Competition from Incumbent Firms During Mergers: Estimating the Effect of Low-Cost Carriers on Post-Merger Prices

2015 2 Acknowledgements I am grateful for the continuous support and guidance of my advisor, Jimmy Roberts. I would also like to thank Professors Michelle Connolly and Tracy Falba for their helpful feedback and revisions as my honors seminar instructors. Finally, I would like to acknowledge my classmates in my honors seminar for their valuable comments during class presentations. Abstract In an evaluation of a merger, the type of existing competitors in the market should play a role in constraining market power following the merger. In the airline industry, heterogeneity between low-cost carriers (LCCs) and legacy carriers suggest that the types of airline competitors could affect the price effects of a merger. This paper investigates the pro-competitive effects that existing, non-merging airline carriers have on prices when an airline merger occurs. Using data in the years around the 2008 merger between Delta and Northwest Airlines, the results show that average price levels of Delta and Northwest dropped after the merger, with larger price decreases on routes with LCC competitors. There is evidence that incumbent LCC competitors have a larger influence than legacy competitors in restricting post-merger prices and market power, confirming that the type of competitors matters in assessing the level of competition in a market. This paper also shows that much of the cost efficiencies from the merger were concentrated on routes with a hub of Delta or Northwest.