ESSAYS ON THE COST EFFECTS OF AIRLINE MERGERS AND ALLIANCES

My dissertation is comprised of two essays in the field of industrial organization with an emphasis on the airline industry. In particular, I investigate how airline mergers and alliances affect the components of total cost. By using a methodology that does not require the researcher to have cost data, I am able to infer marginal costs, fixed costs and sunk costs changes associated with mergers and alliances. My first essay examines two recent airline mergers—Delta/Northwest and United/Continental. Most post-merger analysis in airlines disproportionately focuses on assessing price rather than cost changes. Perhaps one reason is that reliable price data are more readily available. Despite the difficulty of obtaining cost data, researchers have sought to empirically assess whether cost efficiency gains associated with a merger outweigh the increased market power of the merged firm. The results from my analysis suggest that both mergers are associated with marginal and fixed costs savings, but higher market entry costs. The magnitude of the cost effects differed across the mergers. Moreover, I find that the market power effects of these mergers were negligible.