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Decomposing sources of gain from airline mergers: A model and case study from China

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  • Ho, Chun-Yu
  • McCarthy, Patrick
  • Wang, Yanhao

Abstract

This paper proposes a decomposition of sources of gain of airline mergers. Economic analysis of horizontal mergers often attributes the gains of the merger to market power and productive efficiency effects. We adopt a Williamson framework to propose a decomposition analysis quantifying the relative importance of these two effects for airline mergers. First, we use an event study to compute the market power and productive efficiency wealth effects in airline mergers. Second, we use the airline's operating statistics to compute the proportion of profit gain due to market power and productive efficiency. We then apply those proportions to decompose the sources of wealth effects from the event study. In a case study, we apply this methodology to analyze the horizontal merger between China Eastern and Shanghai Airlines in 2009. Our results find that improved productive efficiency contributed about four-fifths to the merged airline's increased wealth, while increased market power contributed about one-fifth.

Suggested Citation

  • Ho, Chun-Yu & McCarthy, Patrick & Wang, Yanhao, 2020. "Decomposing sources of gain from airline mergers: A model and case study from China," Research in Transportation Economics, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:retrec:v:84:y:2020:i:c:s0739885920301943
    DOI: 10.1016/j.retrec.2020.100996
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    More about this item

    Keywords

    Merger; Shareholder wealth; Market power; Efficiency; Decomposition;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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