When consumer type matters: Price effects of the United-Continental merger in the airline industry

Abstract

Studies of airline mergers have largely focused on measuring the impact of mergers on average airfares. As a result, they may not sufficiently reveal the full range of price effects given the complexity of this industry. To address such industry intricacy, I investigate prices of merging firms and their rivals in response to the United-Continental merger on three types of routes: those include one or both endpoint airports as merging firms’ hubs (hub routes), those primarily consisting of price-sensitive leisure travelers (leisure routes), and those more likely to have both price-insensitive business passengers and leisure consumers (big-city routes). Results show that on hub routes, the merger creates hub premiums for merging firms and benefit legacy rivals rather than low-cost carrier rivals to raise fares. On big-city routes, the merging firms increase fares for business travelers but not for leisure passengers, and reduce prices for leisure travelers on leisure routes. Their legacy rivals increase fares on leisure routes but not on big-city routes. This finding suggests that a critical reason for inconsistent conclusions in previous research may be the failure to consider details of the airline industry.