The Price Effect of Eliminating Potential Competition: Evidence from an Airline Merger

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Abstract
Some mergers, in addition to reducing actual competition, may eliminate one firm in its role as a potential entrant into markets served by the other merging party. This paper provides the first direct empirical evidence of the competitive effects of the elimination of potential competition. It examines the merger between USAir and Piedmont Airlines, which involved many routes where one carrier was the incumbent and the other positioned readily to enter. Using data on several quarters of operation before and after the merger, it finds that elimination of such a potential entrant allowed the incumbent carrier to raise price by 5 to 6 percent. This effect is approximately half as large as the price increase on routes where the two carriers had previously been actual competitors. Both represent substantial and statistically significant adverse effects of the merger. These results are robust to variations in definition, classification, and identity of the parties.

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