Run-up to a Merger: Pre-Consolidation Pricing by Merging Airlines and Their Rivals

Abstract The United States airline industry underwent considerable consolidation in a six-year period from 2008 to 2013 due to four domestic airline mergers. This paper analyzes the pricing behavior of rival airlines as well as the merging carriers post-approval but pre-actual integration of operations. Unlike other merger studies that present pre- and post-consolidation results when examining the long-run impact of mergers, this paper focuses on the post-approval period but before the actual consolidation has occurred, so as to determine how rival firms prepare for the consolidation that is entailed by an airline merger: Our analysis tracks the pricing behavior of rival airlines throughout the merger process: beginning with initial merger discussion to the merger announcement to the U.S. Department of Justice (DOJ) approval and subsequent periods. We glean three takeaways from examining recent airline mergers: First, pricing decisions of rival carriers typically mimic the pricing decisions of the merging carriers. Second, the link between mergers and rival pricing varies for each merger; there is no clear relationship that we detect between mergers and price changes by rival airlines as the likelihood of the merger increases. Third, mergers that create a new potential competitor -- as in the case of the Southwest-AirTran merger—are associated with lower prices by rival carriers.