Airline Mergers and the Potential Entry Defense

Horizontal mergers may be approved if antitrust authorities believe that new entry would limit any anticompetitive effects. This argument (‘the potential entry defense’) has led to mergers being approved in concentrated markets in several industries, including airlines. However, entry will be both less likely and less able to constrain market power if the pre-merger entry process has already selected the best firms, for example those with better product qualities, lower marginal costs or lower fixed costs, into the market. We estimate a rich empirical entry model that allows for these types of selection using data from airline routes connecting the hub cities of the major carriers, which are usually the focus of the antitrust authorities concerns when they review airline mergers. Our results indicate that selection is important, and helps to explain the fact that airline mergers have tended to increase prices without inducing significant entry, even though most of these markets have several potential entrants and, in most cities, entry barriers are relatively low. We can also use our model to consider counterfactual mergers. JEL CODES: C63, D43, L11, L41, L93