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Evaluating the Performance of Merger Simulation: Evidence from the U.S. Airline Industry

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  • Peters, Craig
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    Abstract

    This paper uses merger simulations to predict postmerger prices for five airline mergers from the 1980s and compares these predictions with observed postmerger prices. I find that standard simulation methods, which measure the effect of the change in ownership on unilateral pricing incentives, do not generally provide an accurate forecast. By incorporating postmerger information into the model, I measure the relative importance of other factors that also contributed to the observed price changes. The results indicate that the unexplained component of the price change is largely accounted for by supply-side effects. I conclude that deviations from the assumed model of firm conduct play an important role in accounting for the differences between the predicted and observed price changes. This conclusion suggests that the predictive performance of merger simulation would benefit if more flexible models of firm conduct were incorporated into the methodology.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Law and Economics.

    Volume (Year): 49 (2006)
    Issue (Month): 2 (October)
    Pages: 627-49

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    Handle: RePEc:ucp:jlawec:y:2006:v:49:i:2:p:627-49

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    Web page: http://www.journals.uchicago.edu/JLE/

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    Cited by:
    1. Tenn, Steven & Froeb, Luke & Tschantz, Steven, 2010. "Mergers when firms compete by choosing both price and promotion," International Journal of Industrial Organization, Elsevier, vol. 28(6), pages 695-707, November.
    2. Aviv Nevo & Michael D. Whinston, 2010. "Taking the Dogma out of Econometrics: Structural Modeling and Credible Inference," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 69-82, Spring.
    3. Friberg, Richard & Norbäck, Pehr-Johan & Persson, Lars, 2008. "Getting a Better Price: Strategic Behaviour before Changes in Ownership of Corporate Assets," Working Paper Series 777, Research Institute of Industrial Economics.
    4. Dennis Carlton & Ken Heyer, 2007. "The Year in Review: Economics at the Antitrust Division, 2006–2007," Review of Industrial Organization, Springer, vol. 31(2), pages 121-137, September.
    5. Oliver Budzinski, 2011. "Impact Evaluation of Merger Decisions," Working Papers 112/11, University of Southern Denmark, Department of Environmental and Business Economics.
    6. Ciliberto, Federico & Williams, Jonathan, 2010. "Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conjectural Parameters in the Airline Industry," MPRA Paper 24888, University Library of Munich, Germany.
    7. Vivienne Pham & David Prentice, 2013. "A Random Coefficients Logit Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry," Working Papers 2013.04, School of Economics, La Trobe University.
    8. Ater, Itai, 2012. "Internalization of congestion at US hub airports," Journal of Urban Economics, Elsevier, vol. 72(2), pages 196-209.
    9. Vivienne Pham & David Prentice, 2010. "An empirical Analysis of the Counter-factual: A Merger and Divestiture in the Australian Cigarette Industry," Working Papers 2010.08, School of Economics, La Trobe University.
    10. Brito, Duarte & Pereira, Pedro & Ramalho, Joaquim J.S., 2013. "Mergers, coordinated effects and efficiency in the Portuguese non-life insurance industry," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 554-568.
    11. Stephen Martin, 2012. "Market Structure and Market Performance," Review of Industrial Organization, Springer, vol. 40(2), pages 87-108, March.
    12. Budzinski, Oliver, 2012. "Impact evaluation of merger control decisions," Ilmenau Economics Discussion Papers 75, Ilmenau University of Technology, Institute of Economics.
    13. Oliver Budzinski & Isabel Ruhmer, 2009. "Merger Simulation in Competition Policy: A Survey," Working Papers 82/09, University of Southern Denmark, Department of Environmental and Business Economics.
    14. Orley Ashenfelter & Daniel Hosken, 2008. "The Effect of Mergers on Consumer Prices: Evidence from Five Selected Case Studies," Working Papers 1037, Princeton University, Department of Economics, Center for Economic Policy Studies..
    15. Henry Ergas, 2008. "Should Australia Encourage Developing Countries to Adopt Competition Laws?," Asia Pacific Economic Papers 376, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
    16. Jerome Foncel & Marc Ivaldi & Jrisy Motis, 2008. "An Econometric Workbench for Comparing the Substantive and Dominance Tests in Horizontal Merger Analysis," Working Papers 0833, University of Crete, Department of Economics.
    17. Philip G. Gayle, 2013. "On the Efficiency of Codeshare Contracts between Airlines: Is Double Marginalization Eliminated?," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 244-73, November.
    18. Packalen, Mikko & Sen, Anindya, 2013. "Static and dynamic merger effects: A market share based empirical analysis," International Review of Law and Economics, Elsevier, vol. 36(C), pages 12-24.
    19. Paul W. Dobson & Claudio A. Piga, 2009. "Mergers and Business Model Assimilation: Evidence from Low-Cost Airlines Takeovers," Discussion Paper Series 2009_2, Department of Economics, Loughborough University, revised Feb 2009.
    20. Chen, Yongmin & Gayle, Philip, 2013. "Mergers and Product Quality: Evidence from the Airline Industry," MPRA Paper 51238, University Library of Munich, Germany.

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