The Impact of Mergers on Fares Structure: Evidence from European Low-Cost Airlines Essay

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THE IMPACT OF MERGERS ON FARES STRUCTURE: EVIDENCE FROM EUROPEAN LOW-COST AIRLINES PAUL W. DOBSON and CLAUDIO A. PIGA∗ This paper examines mergers that lead to an almost immediate replacement of the target firm’s business model in favor of that of the acquiring firm. We examine the post-merger behavior of the two leading European dedicated low-cost airlines, EasyJet and Ryanair, each acquiring another low-cost airline, Go Fly and Buzz, respectively. We find that both takeovers had an immediate and sustained impact on both the pricing structures and the extent of intertemporal price schedules used on the acquired routes, with early booking fares noticeably reduced and only very late booking fares increased. The analysis suggests that the takeovers had a net beneficial effect for consumers, at least in price terms, as a consequence of the introduction of the acquiring firms’ business models and associated yield management pricing systems. (JEL L11, L13, L93) I. INTRODUCTION In Europe, the rapid growth of low-cost airlines (LCAs) has been made possible by the civil aviation industry being fully liberalized in 1997, allowing any airline registered in any European Union (EU) member state to serve any city-pair inside the EU.1 In the process, the industry has been radically shaken up as LCAs expanded their operations, opening up new routes with new destinations and greatly extending demand with their low prices, forcing the traditional full *We are extremely grateful to Steve Davies, Maria Gil-Molto, Steve Thompson, Mike Walker, Mike Waterson, and an anonymous referee for their helpful comments and suggestions. We are also grateful for helpful comments and feedback received from participants at Centre for Competition and Regulatory Policy Research Workshop, Birmingham, July 2007; the Royal Economic Society Conference, Warwick, March 2008; and European Association for

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