An Empirical Analysis of Merger Efficiencies

Abstract

We develop an econometric framework to study merger efficiencies. Classification methods are employed to determine the sign of the merger's effect on output levels. Building on these classifications, and on familiar oligopoly theory results, we compute bounds on marginal cost savings. We apply this framework to the airline industry and study the 2013 merger of US Airways and American Airlines. The merger led to output expansion in more than half of the markets where the sign of the output effect could be determined, and in at least 44% of the total number of markets that were directly affected by the merger and where the market structure was otherwise stable. Pro-competitive effects were more prevalent in larger markets. Averaging across the markets experiencing output expansions, the lower bound on the marginal cost reduction was slightly above 2 USD, capturing 0.8% of the market price. The analysis provides insights regarding the nature and magnitude of merger efficiencies.