The Dual Effects of Mergers on Peripheral Markets: Evidence from the U.S. Airline Industry

The Dual Effects of Mergers on Peripheral Markets: Evidence from the U.S. Airline Industry

 

Myongjin Kim

University of Oklahoma - Department of Economics

Lawrence Mazur

Purdue University

 

Abstract

Using data on four large mergers in the U.S. airline industry, we find consistent and significant effects of mergers on peripheral markets (i.e. those in which neither of the merging firms currently competes). Although such markets are rarely the focus of antitrust analysis, we demonstrate that they can experience considerable merger-induced changes in the probability of new entry (“entry-threat” effects), which may in turn influence market performance. Moreover, this probability change may be positive, negative, or nil, as each market faces two distinct, often opposing, effects: an increase in the merged firm’s likelihood of entry, and the merger’s elimination of a potential entrant. Ours is the first study to decompose entry threat effects in this way, and we document considerable heterogeneity in both components across markets. Average prices are found to respond non-monotonically to changes in entry probability, with an overall reduction in price for these four mergers on the order of 2% to 3%. Our results have clear relevance for antitrust policy in general, and merger remedies in particular.