Endogenous Product Characteristics in Merger Simulation: A Study of the U.S. Airline Industry
نویسنده
چکیده
Standard merger simulations focus solely on price changes while constraining the set of product characteristics to be identical preand post-merger. Recent papers have begun to address this issue (see, e.g. Fan, August 2013 AER). To overcome the limitations of traditional simulations, I endogenize both prices and product characteristics by specifying a two-stage oligopoly game. After estimating demand and supply system, I simulate the effect of the Delta and Northwest Airlines merger on prices, product characteristics, and welfare. The simulation results show that (i) the merged firm tends to increase product differentiation post-merger; (ii) the higher product differentiation reduces the firm’s incentive to raise prices; (iii) the changes in characteristics and prices increase not only the merged firm’s profit but also consumer welfare. I also compare the predicted to actual post-merger outcome and find that endogenizing product characteristics is essential to better predict the actual outcome. JEL classification: C51, D43, L11, L93
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