Examining the Coordinated Effects of the AA/USAir Merger

Abstract

This paper studies the coordinated effects of the merger between American Airlines and US Airways by examining the extent to which the connecting prices of nonmerging legacy carriers (e.g., Delta Air Lines or United Airlines) evolved when the merger eliminated Advantage Fares, a connecting flight price discounting program offered by US Airways. In our empirical analysis, we find that postmerger nonmerging legacy carriers substantially increased their connecting prices on routes where US Airways had a dominant position. We claim that this unique connecting price pattern around the American/US Airways merger can be associated with the coordinated effects of the merger by ruling out several plausible possibilities. From our theoretical analysis, we show that merger-induced changes in cost structure can explain an incentive to collude of nonmerging carriers. Finally, we note the potential importance of connecting services in a merger review process, which was previously paid less attention to.

Keywords: Airline Mergers, Merger Analysis, Coordinated Effects

JEL Classification: L93, L41, L44