Empirical Essays in Industrial Organization
Open AccessThis dissertation contributes to the extant economics literature on industrial organization via three empirical essays that explore the strategic decisions of firms that compete in imperfectly competitive markets. By using data based on the United States’ airline industry, I combine reduced-form analysis with structural form analysis to investigate the market- and industry-level behavior of oligopolistic firms. Chapter 1 deliberates on the counterfactual merger simulations that have been carried out to establish the value of requiring slot divestiture at slot-controlled airports. I focus on two cases: the United Airlines–Continental Airlines merger and the American Airlines–US Airways merger. Slot divestment is done according to the requirements of antitrust enforcement agencies. The simulation results from three selected airports, Newark Liberty International Airport, Ronald Reagan Washington National Airport, and LaGuardia Airport, indicate that the average airfare reduced for all post-merger air travel products. As a result, the airlines attracted more passenger, creating consumer surplus at the airports. Nonetheless, the airlines are still struggling to alleviate anticompetitive risks resulting from overlapping non-stop routes. These problems occur when slot purchaser fail to enter the market for those routes. To address the structural limitations linked to slot divestiture, I tested other behavioral alternatives besides slot divestment: forcing the surrender of slots operating monopolistic routes, requiring code sharing between merged airlines and low-cost carriers, and opening frequent flyer programs to competitors and/or new entrants. Simulation results from these cases revealed that after merging the operations, the alternative solutions would reduce the average airfare and the number of problematic routes. Therefore, the impact of price was dominant compared to only when slot divestment was needed. Also, requiring slot divestiture, combined with forcing slot purchasers to enter the market for overlapping nonstop routes and promoting code sharing would have lowered the average airfare for all products and the overlapping non-stop routes. However, requiring slot divesture combined with opening of the merged airlines’ frequent flyer programs would not have addressed the problem of anti-competition on overlapping nonstop routes. Chapter 2 is an investigation into the possibility that multimarket contacts result in collusion in the setting of capacity in the US domestic airline market. I first provide reduced-form evidence on the effect of multimarket contacts on the possibilities of firms colluding in setting capacity by demonstrating that levels of multimarket contract have significant negative correlations with the quantity of seats that airlines release. Specifically, the effect of multimarket contact is primarily led by the four largest airlines (Southwest, United, Delta, and American); this has a greater effect in smaller markets in comparison to medium-sized and larger ones. Lead by the evidence, I estimate structural model of demand and supply system with conduct parameter which capture the degree of collusion in setting capacity. The conduct parameter is specified as a function of multi market contact; it will be demonstrated that the conduct parameter shows that there is a significant and positive correlation between multimarket contact and collusion, suggesting that the greater the level of multimarket contact, the lower the quantity of seats that will be offered in comparison to non-collusive oligopoly equilibrium. Chapter 3 empirically investigates how three recent major U.S. airline mergers affected their air travel product quality, focusing on passengers’ convenience, connectivity, and flexibility arising from the merged airlines' network restructuring. Passenger convenience is measured via the difference between total travel time and average nonstop travel time between the origin and destination airports, termed extra travel time. Passenger connectivity is measured as the number of destinations offered at a given airport. Finally, passengers’ travel flexibility is measured via the proxy of the merged airline’s flight frequency on a given route. The regression results indicate that, in general, mergers significantly increase passengers’ extra travel time in the short and long terms. Specifically, mergers lead to more extra travel time from/to de-hubbed airports. Furthermore, each merger was found to associate with increased extra travel time in markets in which the merging carriers had previously competed. In terms of passenger connectivity, while mergers result in an increased number of destinations, the number of destinations served by nonstop flights is not significantly affected. However, the number of nonstop destinations offered at de-hubbed airports reduces considerably following a merger. This study finds no evidence that the mergers’ impact on the number of destinations differs in the case of pre-merger competition between the merging firms. Meanwhile, the results also indicate that mergers tend to lead to a decrease in flight frequency, meaning passengers experience less flexibility concerning flight options, with the effect appearing to be stronger for markets in which the merging carriers had previously competed.
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