Documento de Trabalho 03/2021 - Ex post mergers evaluation: Evidence from the Brazilian airline industry

Competition policy aims to preserve market competition by, for example, preventingmergers that harm consumers. Mergers can diminish competition by facilitating either tacit orexplicit collusion or may creating a unilateral incentive to increase price. While thesepossibilities provide an economic rationale for merger enforcement, mergers might be relatedto improving how markets function. Maldonado and Severino (2019) show that moreproductive firms acquire target firms that are more productive, which indicates the synergythat M&A can bring. Generally, Antitrust Authorities (AAs) analyze cases of M&A and potentialanticompetitive conducts, such as collusion. In this study, we will focus on the decisionscarried out by the Brazilian Antitrust Authority, the Administrative Council for EconomicDefense (CADE), regarding M&A's in the Brazilian airline sector in recent years. The Brazilianairline sector has a fundamental role in the economic development. In 2019, it representedapproximately 1% of the global GDP and faced a growth of 3.3% in air transport expensesregarding to the previous year (IATA, 2019b). In Brazil, Section 88 of the Law 12529/2011 regulates the M&A cases which must bereviewed by Cade. During reviews, the Antitrust Authority studies the impacts that theoperation can have on the market. Some well-known international methodologies, such asthe Upward Pricing Pressure (UPP) and mergersimulations, are commonly used to identify thelikelihood of a merging firm raising prices after the operation – which can be widespread tothe entire market. If prices are expected to rise, consumers will be adversely affected by themerger; thus, to prevent it, CADE can clear a transaction subject to remedies, or block it. Onthe other hand, if the deal does not pose any competition issues, Cade may clear thetransaction unconditionally. Nowadays, many studies indicate the importance of evaluating mergers outcome,especially within the Antitrust Authorities, since "ex-post evaluations can help to determine ifan intervention (or non-intervention) has achieved its objectives and, if not, the reasons itfailed to do so" (OECD, 2016). In response to this demand, the Competition Division of theOECD published a Guide for ex post evaluation to advise authorities on the importance ofmonitoring the outcome of their decisions, which can help to better design futureinterventions. Furthermore, it is worth noting that by carrying out and disclosing ex postmerger evaluations, the antitrust authorities present more transparency towards society and highlight the importance of competition enforcement. In 2019, for instance, Cade publishedits first ex post merger evaluation, which analyzed the impact on products prices of a mergerbetween two firms of the food industry – namely the Sadia-Perdigão case (Severino, Resende,Bispo, 2019). The present study aims to analyze the effects on the average airfare on domestic routesby two mergers cleared by Cade in this sector (GOL and Webjet; and Azul and Trip). This studycontributes to monitoring the competition policy in Brazil in the airline industry, a key sectorfor the country's economic development, by estimating difference in differences (DID) modelsconsidering as dependent variables fare prices and seats sold from July 2010 to December2019. The results indicate a reduction of about 8% in GOL's fare on routes in which GOL andWebjet operated before the merger (overlap routes) and an increase of approximately 38% inthe number of seats sold by GOL in those same routes after the merger. On the other hand,in the merger case of Azul and Trip, we did not find a statistically significant effect on the fare,but we found an increase of nearly 27% in the number of seats sold by Azul on overlap routesafter the transaction. These results present relevant implications. First, we cannot find anticompetitive effectsresulting from these mergers in the Brazilian airline sector; at the international field, similarresults were found by Carlton et al. (2019) during the analysis of three legacy mergers in theUnited States (namely Delta-Northwest, The United-Continental, and The American-USAirways). Secondly, these two mergers were cleared by the Brazilian authority subject toconditions related to the efficiency of the Santos Dumont airport; thus, it is possible to statethat Cade achieved its purpose of protecting competition for the benefit of consumers. Finally,we must take into consideration that these were e specific mergers in a particular period, whichdoes not indicate that these results should be found in every transaction in the airline sector.