Econ 540

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.