Running head MERGER OF AMERICAN AIRLINES .docx

Running head: MERGER OF AMERICAN AIRLINES
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MERGER OF AMERICAN AIRLINES
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ECO 540 Final Project Part Two: Milestone One
Faysal Ahmed
Southern New Hampshire University
9 September 2018
Background and Issues
I. Historical context and mission
The United States Department of Justice (DOJ) was created in
the June 1870, by a statute, that is, the Judiciary Act of 1789.
The Attorney General is the head of this department. Thomas
Jefferson once stated, “The most sacred of the duties of
government [is] to do equal and impartial justice to all its
citizens" (Wara, 2016, p. 172). The guiding ideal for men and
women of the DOJ is the sacred obligation to ensure the
promise of justice is fulfilled. The Department of Justice is
headquartered in Washington. However, much of its work is
carried out in offices that are located in different parts of the
country as well as overseas.
The mission of the Department of Justice is to make sure that
laws are enforced and the interests of the people of the United
States are defended; to make sure there is impartial and fair
administration of justice for all citizens of the country; to
ensure there is just punishment for individuals and organization
found guilty of behavior that unlawful; to offer federal
leadership in controlling and preventing crime; and to make
sure there is public safety against domestic and foreign threats.
The department should ensure that the Americans are protected

from all threats.
II. Key salient merger issues
The paper is basically base on merger. Mergers occur between
companies. The merger of American Airlines to another
competitor in the market will be considered. In this scenario,
American Airline would like to merge with its competitor that is
US Airways.
In regards to the Department of Justice, there may be some
salient issues present in this merger between American Airlines
and US Airways. The first issue is that merging of these two
companies may bring about unfair competition in the
marketplace (Von Kalinowski, Sullivan, McGuirl, Folsom, &
Fine, 2016). Additionally, there may monopoly or oligopoly due
to the merging of the American Airlines and US Airways.
Unfair competition will make competition in the market place
not to be fair. A market that is not free due to unfair
competition will not benefit American consumers. This is
because the prices of services will go up, there will be reduced
choices when selecting services, and quality of services may go
down as a result of monopoly or oligopoly.
Oligopoly and monopoly reduces the level of competition in the
market. With reduced competition the organization will not
compete so much on price and quality. Merging of the American
Airlines and US Airways will lead to the creation of one big
company. Having a very big and strong competitor in the market
will make the playing field not to be leveled for other
competitors in the market, such as Southwest Airlines, United
Airlines, and JetBlue Airlines. Anti-competition restraints will
be felt by the other competitors in the market. This corporate
merger of these two big players may bring down competitive
vigor in domestic market as well as other markets where the
firms are operating. The Department of Justice may believe that
the act by these two companies is predatory. The act is designed
to bring in and maintain the element of monopoly in different

markets these firms are operating.
III. Significance of HHI (Concentration ratio)
It will be possible to measure the market concentration through
the use if the Herfindahl-Hirschman index (HHI) (Naldi &
Flamini, 2014). The Herfindahl-Hirschman index for domestic
market, 10 markets operated by the firms, and two hubs will be
gotten through squaring the market share of each firm, then
summing the obtained after squaring the numbers. The final
value can range between to zero and 10,000.
Herfindahl-Hirschman index (HHI) for domestic market
American Airlines – 16.6 percent
US Airways – 18.3 percent
HHI – (16.62) + (18.32) = 610.45
Ten markets
Chicago – American Airlines 15% US Airways 13.8%
HHI - (152) + (13.82) = 445.44
Miami - American Airlines 14.5% US Airways 5.6%
HHI = 241.61
Dallas - American Airlines 10.4% US Airways 17.3%
HHI = 407.45
Philadelphia - American Airlines 13.9% US Airways 14.4%

HHI =400.57
California - American Airlines 6.5% US Airways 10.2%
HHI =146.29
Brazil - American Airlines 4% US Airways 5%
HHI = 41
Tokyo - American Airlines 2.3% US Airways 3.8%
HHI = 19.73
Paris - American Airlines 4.1% US Airways 7.5%
HHI = 73.06
Bahamas - American Airlines 6.4% US Airways 5.3%
HHI = 74.1
Manchester - American Airlines 3.1% US Airways 3.9%
HHI = 20.25
Two hubs
Los Angeles - American Airlines 22.3% US Airways 21.3%
HHI - (22.32) + (21.32) = 950.99
La Guardia – American Airlines 10.66% US Airways 12.42%
HHI – (10.662) + (12.422) = 267.85
It is important to calculate concentration since it makes it

possible to know whether the merging of the firms will create
concentration in the market. A concentration ratio of 2,500
gives the indication that merging will cause market
concentration, thereby leading to monopoly. Looking and the
HHI calculations of all the markets, the ratios are below 1,000.
This shows that merging will not cause concentration (Statista,
2017).
Evaluation
I. Types of instruments
There is one major instrument that is commonly used by
regulators, such as the Department of Justice to regulate market
power. This instrument is referred to as antitrust laws. This
weapon is used with regulators so as to protect economic
freedom of people as well opportunity. The instrument does this
through promoting fair and free competition in the market.
Antitrust laws are a collection of federal together with state
laws that regulate the organization and conduct companies (Von
Kalinowski et al., 2016). Organization and conduct are
regulated with the goal of promoting fair competition so as to
benefit consumers. The first thing that is restricted by antitrust
laws is acquisitions and mergers that have the ability to lessen
competition. Secondly, it prohibits collusive behaviors and
formation of cartels that are regarded as being in restraint of
trade. Also, they prevent the formation of monopoly that may
end up abusing the power of monopoly.
Consumers benefit positively from competition that emerges
from a fair and free market. The issue identified in this situation
relating to merging of American Airlines and US Airways are
unfair competition and creation of monopoly in the marketplace.
Merging of the two companies will lead to the creating of
market power. The firms will monopolize the market and can
easily abuse the monopoly power they posses. However, it is
easier for the department of Justice to control this through the
use of antitrust laws. The laws can ensure that merging is shut

down so that customers can continue to benefit from great
choice of products, low or fair prices, and better quality of
services in the market.
This instrument, that is, antitrust laws is beneficial. Among its
benefits is that it restricts the formation of monopolies, cartels,
or collusive practices that may discriminate consumers, create
predatory pricing, favoritism, impact quality of products and
services, and increase prices. The other benefit of the
instrument is that it ensures there is a free market, where the
prices of products and services are controlled by forces of the
market, among them demand and supply. Moreover, antitrust
laws create a consumer-protected economy. This is an economy
where sellers are very honest while providing their services and
products at fair prices (Von Kalinowski et al., 2016). It is easier
for companies that operate sincerely to prosper.
The antitrust laws of the United States are very stringent. This
disadvantages the American firms while they are operating in
the global market. Additionally, the laws limit free growth or
expansion of businesses through mergers and acquisitions. This
means that it prevent companies from engaging in practices that
may help them increase their customer base, revenues and
profits.
II. Implication of imperfect information
Perfect information is an element that is very important when it
comes to a competitive market. The presence of the element of
imperfect information in the market will have negative effect,
especially on consumers. The transactions in the market will
have the characteristics of asymmetry. This is because the
seller, who will be a company, formed after the merging of
American Airlines and US Airways, will more information
regarding economic transactions in the market compared to
buyers, who are customers of the airlines.
The company formed as a result of merging will know more
about the customers in the market. This is not good since it has

the ability to cause increase in prices of services that are
provided and decline in quantity of services due to the
formation on one firm. The market will not be able to reach
equilibrium. This imperfect information favors the seller of
services. It will be likely for buyers to make poor decisions in
the market due to information asymmetry. The customers will
not be having all the information that is needed to make
informed decisions regarding the quality and prices of products
and services that is being provided in the market. The bad thing
with imperfect information is that it may discourage customers
of the airlines from participant in the market. Customers will be
reluctant to take part in many activities because they do not
have the ability to determine quality of services that are being
provided or prices. This may be also be brought in also be the
element of reduced choices regarding services that are given.
Recommendation
From the results obtained, there is no ratio that is beyond 1,500
or close to 2,500. This is from values of the domestic market,
hubs, and other ten markets. The decision to prevent the merger
of these two firms by the Department of Justice was not correct.
The calculations show that there will be no concentration in all
the selected hubs and markets. Even with the merger of
American Airlines and US Airways, there will still be perfect
competition in the markets. This means that there will be no
need to divert route or change hubs.
References
Statista. (2017). Domestic markets share of leading U.S airlines
in 2016. Retrieved from
https://www.statista.com/statistics/250577/domestic-market-
share-of-leading-us-airlines/
Wara, M. (2016). Fostering Competition in the 21st Century
Electricity Industry. Harv. Envtl. L.
Rev. F., 40, 41.

Von Kalinowski, J. O., Sullivan, P., McGuirl, M., Folsom, R., &
Fine, F. (2016). Determining
Legality and Defenses (Vol. 2). Antitrust Laws and Trade
Regulation, Second Edition.
Naldi, M., & Flamini, M. (2014, March). Interval estimation of
the Herfindahl-Hirschman index
under incomplete market information. In Computer Modelling
and Simulation (UKSim), 2014 UKSim-AMSS 16th
International Conference on (pp. 318-323). IEEE.
ECO 540 Final Project Part Two Guidelines and Rubric
Overview
The second part of the final project is a regulatory analytical
paper. It is an analytical paper written from the position of a
government regulator looking at the
merger from Final Project Part One to identify any potential
market distortion and what might be done to mitigate the impact
to consumers or competitors. In
this paper, you will evaluate the types of instruments that
regulators have for regulating market power for the instruments’
effectiveness in this situation. What
type of policy actions might the government implement for
regulating market power? What would you suggest and why?
Remember your analysis must address
the cost/benefit of these decisions. Consider the change in HHI
(concentration ratio) for the markets that the merging airlines
dominate. For this paper, you must

identify tools that would be more effective, rather than just
challenging or prohibiting the merger. The project has one
milestone. This milestone will be
submitted in Module Eight. The final product will be submitted
in Module Ten.
In this assignment, you will demonstrate your mastery of the
following course outcomes:
economic decisions and behaviors
addressing market failures related to excessive market power
Specifically, the following critical elements must be addressed:
I. Background and Issues
a) Provide a brief historical background on the Department of
Justice (DOJ) and its mission in this area.
b) Identify the key salient issues specific to this merger in
regards to this agency (DOJ).
c) What is the HHI (concentration ratio) for the domestic airline
industry, for the 10 markets in which the pre-merger airlines
have the largest
combined market share, and for the two hubs for which the pre-
merger airlines have the largest combined market share? What
is the
significance of this ratio in addressing the key salient issues?
II. Evaluation: Tools and Implications

a) Evaluate the types of instruments that the regulators use for
regulating market power, specific to the issues you identified
for this situation.
What are the costs? What are the benefits?
b) Evaluate the implications of imperfect information upon
economic decisions and behaviors of stakeholders, specific to
these tools and this
merger.
III. Recommendations: Suppose that a federal court has ruled
that the DOJ did not show sufficient harm to prohibit the merger
altogether, BUT that the DOJ
did show that harm will result in selected markets and/or hubs,
yet did not present sufficient evidence to support one approach
(divesting one of the
airlines' routes in certain markets) over the other (divesting one
of the airlines' presence at certain hubs).
a) Calculate the following ratios prior to preparing your
recommendations. You must correctly demonstrate your full
process for calculating these
ratios; simply including the end result is not sufficient. Include
your work as a table or addendum in your paper.
i. For the 10 city-pair markets in which the merged airline will
have the largest share, calculate the post-merger HHI.
ii. Suppose that one of the merging airlines gives up its flights
in those 10 markets. Calculate the new HHI and estimate the
lost revenue for

the merged airline.
iii. For the two hubs in which the merged airline will have the
largest share, calculate the post-merger HHI.
iv. Suppose that one of the merging airlines gives up all flights
in each of those two hubs. Calculate the new HHI and estimate
the lost
revenue for the merged airline.
b) Recommend an alternative policy approach that is justified
by your evaluation. Specifically, you will evaluate the two
approaches, comparing the
results in terms of achieving an HHI target of 2500 or below in
the markets/hubs versus revenue loss to the post-merger
combined airline, and
make a recommendation.
Milestones
Milestone One: Regulatory Background Issues and Market HHI
In Module Eight, you will submit your regulatory background
issues, including calculation of the HHI for the top 10 markets
and top t2 hubs. This assignment
should be formatted as a 3–4-page Microsoft Word document.
This milestone is graded with the Final Project Two Milestone
One Rubric.
Final Submission: Regulatory Analytical Paper
In Module Ten, you will submit your regulatory analytical
paper. It should be a complete, polished artifact containing all
of the critical elements of the final
product. It should reflect the incorporation of feedback gained
throughout the course. This submission is graded with the Final
Project Part Two Rubric.

Final Project Part Two Rubric
Guidelines for Submission: This assignment should be 3–4
pages in length with double spacing, 12-point Times New
Roman font, and adherence to all
appropriate writing conventions, including APA style citation
format and a scholarly tone.
Instructor Feedback: This activity uses an integrated rubric in
Blackboard. Students can view instructor feedback in the Grade
Center. For more information,
review these instructions.
Critical Elements Exemplary (100%) Proficient (90%) Needs
Improvement (70%) Not Evident (0%) Value
Background and
Issues:

Historical Context and
Mission
Meets “Proficient” criteria and
is substantiated by scholarly
sources that represent breadth
of viewpoints on the topic
Provides historical background
on Department of Justice and
its mission in relation to merger
situation
Provides historical background
on Department of Justice but
with gaps in connecting this
background to merger situation
Does not provide historical
background on Department of
Justice
10
Background and
Issues:
Key Salient Merger
Issues
is well qualified using specific
scholarly examples

Explains key issues specific to
this merger in sufficient detail
to establish their importance
Explains issues relevant to this
merger but with gaps in
supporting detail
Does not explain key issues
specific to this merger
15
Background and
Issues:
Significance of HHI
(Concentration Ratio)
process is well executed with
no extraneous calculations
Correctly calculates ratios and
assesses their significance in
addressing the key salient
merger issues
Correctly calculates ratios but
does not assess their
significance in addressing the
key salient merger issues
Does not correctly calculate
ratios or assess their

significance in addressing the
key salient merger issues
15
Evaluation:
Types of Instruments
scholarly examples
Evaluates costs and benefits of
the major instruments that the
agency has available, specific to
addressing this merger
situation
Evaluates major instruments
that the agency has available
but with gaps in addressing
costs and benefits applicable to
this merger situation
Does not evaluate the major
instruments that the agency
has available
20
Evaluation:
Implications of
Imperfect Information

scholarly examples
Evaluates the implications of
imperfect information upon the
economic decisions and
behaviors of the stakeholders
specific to this merger
Evaluates the implications of
imperfect information upon the
economic decisions and
behaviors of the stakeholders,
but with gaps in establishing
context to merger
Does not evaluate the
implications of imperfect
information upon the economic
decisions and behaviors of the
stakeholders specific to this
merger
15
Recommendation:
Ratio Calculations
process is well executed with
no extraneous calculations
Correctly calculates ratios,
demonstrating all process steps

in achieving end result
Calculates all ratios correctly
but with gaps in process
demonstrating steps in
calculations
Does not correctly calculate
ratios
8
http://snhu-
media.snhu.edu/files/production_documentation/formatting/rubr
ic_feedback_instructions_student.pdf
Recommendations
identifies the choice in each
market that gets closest to
achieving an HHI of 2500 at
least negative impact to
revenue
Recommends an alternative
policy approach that is justified
by evaluation
Recommends an alternative
policy approach but with gaps
in how it is supported by
evaluation

Does not recommend an
alternative policy approach
12
Articulation of
Response
Submission is free of errors
related to citations, grammar,
spelling, syntax, and
organization and is presented in
a professional and easy-to-read
format
Submission has no major errors
spelling, syntax, or organization
Submission has major errors
that negatively impact
readability and articulation of
main ideas
Submission has critical errors
that prevent understanding of
ideas

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