Evaluating the Performance of Merger Simulation: Evidence from the U.S. Airline Industry

Abstract:     
This paper uses merger simulations to predict post-merger prices for six major airline mergers from the 1980's, and compares these predictions with actual post-merger prices. Simulations which incorporate varying degrees of post-merger information allow us to decompose the actual price changes into its component effects. The results suggest that standard simulation methods, which measure the effect of the ownership transfer on pricing incentives, can account for a large component of the post-merger price change, but should not be expected to account for all of it. Changes in marginal cost or firm conduct generally account for most of the remainder, while post-merger entry and changes in observed and unobserved demand-side variables typically have a relatively small effect. A comparison of two alternative demand models indicates that the cross-price elasticities, and hence simulated prices, are quite sensitive to the demand specification.

Number of Pages in PDF File: 53

Keywords: Mergers, merger simulation, airlines, demand estimation

JEL Classification: L11, L40, L93

working papers series