The Department of Justice (DOJ) has a shot at blocking the American Airlines and US Airways merger, but only if their argument is supported by solid evidence that properly values pricing power in addition to quantifying concentration in city pairs that could be adversely impacted by having one less network airline. The DOJ will have to prove that any potential anticompetitive cost will exceed potential benefits produced by the merged airline. Potential benefits include lower average pricing throughout the entire network, especially in the U.S. domestic market….
Economies of density result in reductions in average costs as traffic volume on the given route is increased. This is the key benefit of the merger, and it cannot be excluded from the analysis of pricing power and concentration. Costs must be measured in revenue passenger mile terms, and when costs go down as a result of new economies of density, fares can be reduced on individual city-pairs even when there is less competition on that specific route.