We estimate a model of route-level competition between airlines who choose whether to offer nonstop or connecting service before setting prices. Airlines have full information about all quality, marginal cost, and fixed cost unobservables throughout the game, so that service choices will be selected on these residuals. We conduct merger simulations that allow for repositioning and account for the selection implied by the model and the data. Accounting for selection materially affects the predicted likelihood of repositioning and the predicted magnitude of post-merger price changes, and it allows us to match what has been observed after consummated mergers.

Sweeting conducted some of this research during a five-month spell as an Academic Visitor at the US Department of Justice, whose hospitality is warmly acknowledged, although the paper does not reflect the views, opinions or practice of the Department. We thank a number of seminar participants and discussants for useful comments. The research has been supported by NSF Grant SES-1260876. An earlier version of this paper was circulated as "Airline Mergers and the Potential Entry Defense." Peichun Wang provided excellent research assistance during an early phase of the project. The usual disclaimer applies. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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