Simulating the Dynamic Effects of Horizontal Mergers: U.S. Airlines

Posted by D. Daniel Sokol

C. Lanier Benkard (Stanford - Business), Aaron Bodoh-Creed (Stanford - Econ) and John Lazarev (Stanford) undertake some interesting work regarding Simulating the Dynamic Effects of Horizontal Mergers: U.S. Airlines.

ABSTRACT: We propose a new method for studying the medium and long run dynamic effects of horizontal mergers. Our method builds on the two-step estimator of Bajari, Benkard, and Levin (2007). Policy functions are estimated on historical pre-merger data, and then future industry outcomes are simulated both with and without the proposed merger. Using data for 2003-2007, we apply our model to two recently proposed airline mergers. In our airline entry model, an airline’s entry/exit decisions are made jointly across routes, and depend on features of its own route network as well as the networks of the other airlines. The model allows for city-specific profitability shocks that affect all routes out of a given city, as well as route-specific shocks. We find that the model fits the data very well. Empirical conclusions in the paper are preliminary.