Thursday, August 15, 2013

Is US Airways a Maverick?

As I have observed in multiple posts the past two days, the potential elimination of US Airways' Advantage Fares program appears to be an important component of the DOJ's opposition to the American Airlines/US Airways merger. Although the complaint doesn't use the actual term "maverick," it is clear from the analysis that the DOJ views US Airways operations under that program as playing the role of a "maverick" firm.

Under the 2010 Guidelines, one piece of evidence that the DOJ can use to determine that a merger will have anti-competitive effects is if the merger eliminates a maverick firm:  

The Agencies consider whether a merger may lessen competition by eliminating a “maverick” firm, i.e., a firm that plays a disruptive role in the market to the benefit of customers. For example, if one of the merging firms has a strong incumbency position and the other merging firm threatens to disrupt market conditions with a new technology or business model, their merger can involve the loss of actual or potential competition. Likewise, one of the merging firms may have the incentive to take the lead in price cutting or other competitive conduct or to resist increases in industry prices. A firm that may discipline prices based on its ability and incentive to expand production rapidly using available capacity also can be a maverick, as can a firm that has often resisted otherwise prevailing industry norms to cooperate on price setting or other terms of competition.(2010 Horizontal Merger Guidelines 2.1.5).

The maverick firm concept has been a part of antitrust law for a while (see this 2002 article by Jonathan Baker for a great discussion of the concept and application to scenarios involving the airline industry). But it has received increased attention under the Obama administration, appearing in DOJ complaints against recent high profile merger attempts such as AT&T/T-Mobile and H&R Block/TaxACT (this 2013 note from Taylor Owings provides a good overview of recent cases).

So what makes US Airways a maverick firm? As I wrote Tuesday, and as the section V.C.1. of the complaint explains, under the Advantage Fares program US Airways offers one-stop flights on certain routes that significantly undercut the fares offered by dominant non-stop carrier on those routes. According to the complaint, the other major network carriers don't use connecting flights to undercut prices on their competitors' non-stop monopolies out of fear of retaliation on their own non-stop routes. It is only the less profitable structure of US Airways' own non-stop routes that gives US Airways the incentive to compete in this way. This lines up with two of the potential maverick firm characteristics described above: US "[has] the incentive to take the lead in price cutting or other competitive conduct or to resist increases in industry prices," and "has often resisted otherwise prevailing industry norms to cooperate on price setting or other terms of competition."

So will the court buy this maverick firm argument? An examination of the court's opinion in H&R Block suggest that it might. That court was highly dismissive of the importance of labeling one of the firms involved as a "maverick," at one point accusing the government of playing "semantic gotcha." This may be one reason why the DOJ declined to use the term in this complaint, instead describing the Advantage Fares program as "highly disruptive to the industry's overall coordinated pricing dynamic." However, the court in H&R Block was persuaded by the underlying theory -- that TaxACT played a special market role that constrained prices and its elimination would therefore be anti-competitive. So there is no reason to assume the court will reject the theory outright. Additionally, the DOJ presents fairly persuasive evidence that the Advantage Fares program will be discontinued should the merger go forward, addressing the frequent counterargument from merging firms that the competitive "maverick" behavior will continue post-merger. To defeat the DOJ's argument, attorneys for American Airlines and US Airways are likely to contest whether US Airways, through its Advantage Fares program, actually plays a price-constraining role within the domestic air service market, a claim some have already disputed.

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