Is There Still a Southwest Effect?

Abstract

The U.S. airline industry is in a period of consolidation through mergers between leading carriers. A number of recent mergers have been approved by the Antitrust Division of the Department of Justice (DOJ), in part because of the presence of Southwest Airlines in the affected markets. In its approval of the mergers, DOJ makes a key assumption that Southwest is unresponsive in its pricing strategy to the reduced competition when its competitors merge. Numerous studies have validated the so-called Southwest effect, through which potential or actual entry into a market by Southwest Airlines is associated with lower market fares. However, considerably less work has examined Southwest's postentry pricing strategies. This study finds that Southwest raised fares more between 2005 and 2010 in markets affected by the Delta–Northwest and US Airways–America West mergers than in other markets. Southwest's fares either decreased or rose by less when the company was facing direct or adjacent competition from a low-cost carrier (LCC). DOJ's approval of Southwest's merger with AirTran, its biggest LCC competitor and strongest deterrent to raising fares in merger-affected markets, raises questions about Southwest's ability to continue as a suitable deterrent to postmerger fare hikes, particularly in the absence of other LCCs in those markets.