What's the Difference? Measuring the Effect of Mergers in the Airline Industry

Abstract

We analyze the effect of four US airline mergers using three retrospective techniques: standard difference-in-differences regression, synthetic control, and nearest neighbor matching. We study if these techniques can be reliably applied to study airline mergers, and find a number issues. For example, routes typically specified as controls are potentially impacted by the merger, and the more advanced techniques may be subject to unobservable variable bias. As such, the estimated effect of a merger does not always align in direction or statistical significance across the three methods. We also expand the analysis beyond the average treatment effect on overlap routes. We find that the increase in multi-market contact from each merger caused prices to increase on a large set of non-overlap routes. Lastly, with the aim of providing guidance to antitrust agencies, we analyze the determinants of route-level price effects on overlap routes. We find that even in mergers where the average effect is different from zero (e.g. American/USAir and United/Continental), there is substantial heterogeneity across overlap routes. The route-level effect is predictable based on pre-merger observables, such as the level of HHI.

Keywords: Merger Retrospectives; Airline Industry; Synthetic Control

JEL Classification: L4; D4; L93