Empirical Evidence of Airline Merger Waves Based on A Selective Entry Model

Ever since the Deregulation Act in 1978 in the U.S. airline industry, there have been series of major airline mergers and acquisitions, notably three major waves in the 1980’s, 1990’s, and late 2000’s. These mergers, especially the more recent multi-billion mergers (e.g. DeltaNorthwest, United-Continental) have shown a trend of substantial market consolidation that inevitably worries consumers as well as the U.S. Department of Justice (DoJ). Most academic literature to date have tried to study mergers in a static setting where these mergers are assumed to be exogenous. However, the clear pattern of merger waves in the airline industry, as well as many other industries, suggests strong correlation between mergers. A few studies that attempted at a dynamic merger model remain theoretical due to computational barriers. In this paper, I found empirical evidence of merger waves by investigating the change of airline carriers’ incentive to merge after another merger between two other carriers. These results are based on a structural model of the U.S. airline industry, in which I estimate demand with a standard (for differentiated product markets) discrete-choice nested logit model, but allow for selection on entrants’ costs and qualities, i.e. firms with lower costs and higher qualities would have been selected into the market before the merger, suggesting that post-merger entry is less likely than what non-selective entry models have predicted. JEL Classification Numbers: L13; L25; L93.