Review of Industrial Organization
12: 793–800, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Airport Concentration and Market Power: An Events
MATTHEW J. HERGOTT
The Fuqua School of Business, Duke University, Towerview Drive, Durham, NC 27708, U.S.A.
Abstract. This paper presents independent conﬁrmation of the results obtained in recent studies that
suggest mergers and acquisitions creating airline dominance at the airport level lead to market power.
Using a different methodology – an events study for the 1986 merger of Northwest Orient Airlines
and Republic Airlines – this paper conﬁrms those results, indicating that concentration in the context
of the sunk costs associated with the operation at a particular airport facility allows market power in
the airline industry.
Key words: Merger, airlines, events study, market power.
The airline industry’s increasing reliance on the hub-and-spoke system in the 1980s
led to increases in airport concentration levels as measured by an airline’s share of
ﬂights ﬂown through an airport. While it undoubtedly created efﬁciencies of scale,
the increasing industry concentration – coupled with barriers to entry in the form
of sunk costs for accessing particular airport facilities – had the potential to enable
airlines to raise prices above marginal cost.
A prime example of the beneﬁts and possible drawbacks to this trend was
the 1986 merger between Northwest Orient Airlines and Republic Airlines. The
transaction created the third largest U.S. airline in terms of passenger miles (L.A.
Times, 1986, p. 4:1), and the Hirschman-Herﬁndahl index increased by 935 to
a post-merger value of 3,164 for Detroit’s airport and by 3,146 to a post-merger
6,346 for Minneapolis/St. Paul (Becker, 1986, p. 1). Concentration was increasing
throughout the industry. It was feared that the trend towards industry consolidation
would create well-recognized spheres of inﬂuence among the airlines, reducing the
likelihood that the airlines “would embark on a new round of fare wars or seek to
move aggressively into each other’s markets” (Lopez, 1986, p. 723).
This paper uses an events study of the rate of return to the stocks of the rivals of
the merging ﬁrms to analyze the merger’s effects on economic performance. The
formal econometric result of an events study will at best reveal the stock market’s
evaluationof the rival’s net change in anticipated proﬁts because of the merger. But
I began work on this paper while I was a student at Dartmouth College. I wish to thank John T.
Scott, Geoffrey Shepherd, and the two anonymous referees for helpful comments and suggestions.