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

Chun-Yu Ho, Pat McCarthy and Yanhao Wang

Research in Transportation Economics, 2020, vol. 84, issue C

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.

Keywords: Merger; Shareholder wealth; Market power; Efficiency; Decomposition (search for similar items in EconPapers)
JEL-codes: G14 L22 L41 L43 L93 L98 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.retrec.2020.100996

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