Repositioning and market power after airline mergers

Abstract

We estimate a model of route-level competition between airlines who choose whether to offer nonstop or connecting service before setting prices. Airlines have full information about all quality, marginal cost, and fixed cost unobservables throughout the game, so that service choices will be selected on these residuals. We conduct merger simulations that allow for repositioning and account for the selection implied by the model and the data. Accounting for selection materially affects the predicted likelihood of repositioning and the predicted magnitude of post-merger price changes, and it allows us to match what has been observed after consummated mergers.