ESSAYS ON INDUSTRIAL ORGANIZATION
thesisposted on 13.08.2019, 17:50 by Somnath DasSomnath Das
My dissertation consists of three chapters. In the first chapter, I analyze theeffect of the merger between American Airlines (AA) & US Airways (US) on market price and product quality. I use two complementary methodologies: difference-in-differences (DID) and merger simulation. Contrary to other results in the airline literature, the DID analysis shows that, overall, price has decreased as a result of themerger. While divestitures required as part of the merger had a strong price-reducing effect, the overall decrease involves non-divestiture markets as well. Interestingly, the decrease appears only in large airport-pair markets, whereas prices rose considerably in smaller ones. Effects on quality are mixed. The DID analysis shows that the merger reduced flight cancellations, increased flight delays, and had no effect on flight frequency or capacity overall. Using merger simulation, I find that the change in ownership leads to a 3% increase in price. The structural model performs betterin predicting the post-merger price if I allow the model to deviate from the Bertrand-Nash conduct. A 10% cost reduction due to the merger is able to predict the post-merger price quite well. When I incorporate a conduct parameter into the model, the required percentage of cost savings is lower. Given the divestiture and the subsequententry of low-cost carriers (LCCs), tacit collusion may break down. Thus both cost savings and reduced cooperation could explain a reduction in the price in the post-merger period.
In my second chapter, I analyze possible reasons why airline prices are higher inthe smaller markets compared to larger markets. In the literature, most of the studies ignore the fact that the smaller markets are different compared to larger markets in terms of the nature of competition. I find that a combination of lower competition, and lack of entry from low cost carriers (LCCs) are the reasons behind higher prices in the smaller city-pair markets. I show that price is substantially higher in a market with a fewer number of firms controlling for several other factors. My paper estimates the modified critical number of firms to be 5 and the critical value of the HHI to be .6.
In my third chapter, I study the effect of announcement of investment in research & development (R&D) on the value of a firm in the pharmaceutical industry. Three types of R&D by the pharmaceutical firms are considered for the analysis: acquisition of other smaller firms, internal investment in R&D, and collaborative investment in R&D. This chapter finds that few target specific characteristics and financial charac-teristics of the acquiring firm are important drivers of the abnormal returns around the announcement period.