Identifying Merger Opportunities: The Case of Air Traffic Control

Horizontal mergers and acquisitions offer firms the means to grow. However, forecasting these actions’ potential effects on the market is not a simple task. We propose a model that identifies optimal horizontal merger configurations for an industry. The model endogenizes the merger choice by maximizing the overall potential efficiency gain at the level of an industry or firm with multiple branches. We further extend the model to consider mergers that create contiguous firms, should network effects be a consideration. The optimal solution, estimated as a consequence of a change in industry structure, is decomposed into individual learning inefficiencies in addition to harmony and scale effects. The efficiency gains are estimated using a nonradial, directional distance function to facilitate this decomposition. An application of the model to the European air traffic control market suggests that the market ought to be reduced to 4 contiguous firms, replacing the 29 analyzed and the 9 proposed in the Single European Skies initiative. This is likely to lead to overall savings of around e3.3 billion annually, of which approximately 82% is directly attributable to merger synergies. Furthermore, this represents an additional annual saving of e1.2 billion over that achieved by the second best: the Single European Skies initiative.