On May 3, 2010, United Airlines and Continental Airlines announced a $3 billion merger that would create the world’s biggest airline. The deal was completed in a remarkably short three weeks, and would give the airlines the muscle to fend off low-cost rivals at home and to take on foreign carriers abroad. For consumers, the merger could eventually result in higher prices although the new company does not intend to raise fares. One of the rationales for airline mergers is to cut capacity.
a. Explain how this airline merger might increase air travel prices.
b. Explain how this airline merger might lower air travel production costs.
c. Explain how cost savings arising from a cut in capacity might get passed on to travelers and might boost producers’ profits. Which do you predict will happen from this airline merger and why?