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Higher Together: Price and Welfare Effects of a Merger Between Two Low Cost Carriers

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Abstract: This paper conducts a retrospective analysis of a unique merger between two low cost carriers: Southwest Airlines and AirTran Airways. The paper begins with a detailed study of price effects for a variety of routes affected by the merger such as overlapping markets, markets where either carrier exerted potential competition, and markets where AirTran ceased service following the merger. The significant magnitude of price increase indicates that a merger between two carriers that had an industry reputation of disciplining fares of other carriers has wide ramifications on welfare. The price analysis is followed by a structural model of airline competition that is used to quantify the impact of the merger on welfare in overlapping markets. The finding shows that following the merger, consumer welfare decreased and airlines pro ts increased. A merger simulation exercise is also performed to assess the difference between actual post-merger prices and simulated prices. The findings show that the actual post prices are higher than that suggested by the simulation model.

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