Essays in Competition Economics

Abstract

Three self-contained essays explore government regulation in the airline industry, and how such policies affect competition. The first essay explores the proposed merger between US Airways and American Airlines in 2013, approved by the US Department of Justice (DOJ) under the condition that 104 airport slots (“landing rights”) at Ronald Reagan Washington National Airport, DC, be divested to low cost carriers. To investigate the efficacy of the slot divestment, I estimate demand and cost parameters along with bounds on the shadow price of an airline slot, and simulate counterfactual post-merger prices and quantities with and without the regulatory divestment. I find that the merger and associated divestment together increased consumer surplus for markets involving Reagan Airport by roughly 25%. This increase in consumer welfare happened because the median price fell and the quantity of passengers increased. I show that the marginal value of a slot to an airline is decreasing in total slots, validating the DOJ’s decision to divest slots from the largest incumbent (US Airways, whose marginal value was $153 per flight) to new entrants with high valuation (like Southwest, $852). Beyond providing a key input to merger analyses, my approach can also aid in analyzing voluntary exchanges of airline slots, which are subject to DOJ approval due to their perceived anti-competitive effects. The second essay investigates the impact of airport slots on competition in general. Congestion is managed in high-density airports by capping the number of flights permitted in any given hour and allocating the rights (or slots) to a takeoff or landing among airlines. Airlines must use their slots at least 80% of the time to keep them for the next season. This rule creates a perverse incentive for airlines to hold on to underutilized slots by operating unprofitable flights instead of forfeiting these slots to a rival. Using exogenous removal of slot control at the Newark Airport in 2016, we investigate the lengths at which airlines go to meet the minimum requirements that let them keep the slots while violating what a neutral observer might call the “spirit” of the regulation. In my third essay, I assess the effectiveness of the gross upward pricing pressure index (GUPPI) in predicting price changes of the 2013 merger between US Airways and American Airlines. I compute GUPPI using only publicly available data, and find that it is close to the observed average increase in price. However, unlike most markets, flights to/from Reagan Airport experience a price drop, likely due to mandated structural remedies; the GUPPI predicts a price increase at Reagan Airport, whereas a full merger simulation correctly predicts a price reduction. I argue that the divergence between GUPPI and, if appropriate, the more accurate predictions of the merger simulation is due to the weaker assumptions made under the simulation. This underscores the fact that while GUPPI, with its restrictive assumptions and low computational burden, can be a good primary screening tool, it does not negate the necessity of employing a more rigorous secondary tool (such as a merger simulation) when assessing mergers.