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Estimating Dynamic Merger Effciencies with an Application to the 1997 Boeing-McDonnell Douglas Merger

Zhao, Wei (2013): Estimating Dynamic Merger Effciencies with an Application to the 1997 Boeing-McDonnell Douglas Merger.

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Abstract

I evaluate the welfare effects of the 1997 merger between Boeing and McDonnell Douglas in the medium-sized, wide-bodied aircraft industry. I develop an empirical model of multi-product firms, allowing for both learning-by-doing and product innovation in a dynamic game to quantify merger efficiency. Merger efficiency from learning-by-doing is then disentangled from both the effects of innovation and market power. The results show that the primary benefits from the Boeing-McDonnell Douglas merger come from accelerated learning-by-doing. Taking account of all static and dynamic effects, net consumer surplus is found to have increased by as much as $1.57 billion. In contrast, a static model ignoring learning-by-doing and innovation predicts a consumer loss of approximately $20 billion. These results show that ignoring dynamic effects can lead to biased results and erroneous policy decisions regarding the welfare effects of proposed mergers.

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