Essays on Industrial Organization

Somnath Das, Purdue University

Abstract

My dissertation consists of three chapters. In the first chapter, I analyze the effect of the merger between American Airlines (AA) & US Airways (US) on market price and product quality. I use two complementary methodologies: difference-indifferences (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 the merger. 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 better in predicting the post-merger price if I allow the model to deviate from the BertrandNash conduct. A 10% cost reduction due to the merger is able to predict the postmerger 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 subsequent entry 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 postmerger period. In my second chapter, I analyze possible reasons why airline prices are higher in the 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 characteristics of the acquiring firm are important drivers of the abnormal returns around the announcement period.

Degree

Ph.D.

Advisors

Martin, Purdue University.

Subject Area

Finance|Management|Pharmaceutical sciences|Recreation|Transportation

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