Macroeconomics: Airline and Air Transport World Essay...

American Airlines are US airways are being invesitagted by the Department of Justice for an civic anti-trust lawsuit. American Airlines and US Airways, two major International Airline companies are undergoing a merger. The DOJ claims that this merger is anti trist and will do nothing but create more costs and fewer flights for customers and would result in “ hundreds and millions of dollars In harm for american customers.” (Walker, 2013) Both Airlines can tehnically survive alone, and they merging of the two would eliminiate the benefit competitve costs and competitive dynamics. The Airlines are fighting that this merger would actually result in reduced costs and more routes. However, based on The White Paper, “Merger-related cost savings are a controversial subject. The economic literature has hosted an ongoing debate over issues relating to the tension between network size versus economies of scale and density, and efficiencies versus market power effects. This includes empirical economic work showing that efficiencies dwindle as networks increase in size and the effects of increased “hubbing” on congestion and costs.” As mergers become larger, the bar is raised on carriers to demonstrate to the DOJ that claimed efficiencies are substantial enough to overcome correspondingly large anticompetitive effects.”(Ross, Mitchell, 2012)

American Airlines is the fourth largest and US Airways is the 5th largest national airline.(www.antitrustinstitute.org) The combining of the two would take up 70% of the air travel market, which would create a oligopoly. Oligopoly firms are also able to take advantage of economies of scale that reduce production costs and prices. As large firms, they can mass produce at low average cost. Many modern goods--including cars, computers, aircraft, and assorted household products--would be significantly more expensive if produced by a large number of small firms rather than a small number of large firms.

An oligopoly does not efficiently allocate resources. Like any firm with market control, an oligopoly charges a higher price and produces less output than the efficiency benchmark of perfect competition. “Ogliopoly tends to be the worst efficiency offender in the real world, because perfect competition does not exist,

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