Jonathan Gao: What Do Mergers Mean for Prices?

Jonathan Gao will write his senior thesis on the economics of mergers.

Durham, NC - Are you blaming those rising prices for airplane tickets on the mergers in the industry? Senior Jonathan Gao says you might be right but the economics of the ticket price isn't that straightforward.

The economics and math major from Ellicott, Md., studies a field of economics called industrial organization, which looks at firms, sellers, product pricing and competition in various markets. His project specifically looks at how the prices of airplane tickets fluctuate after airline company mergers.

Using data collected by the U.S. Department of Transportation, Gao is looking at price fluctuations following two mergers: Delta Air Lines merging with Northwest Airlines in 2008 and United Airlines merging with Continental Airlines in 2010. Gao is working with Associate Professor of Economics James Roberts and is planning on using his research as part of a senior thesis.

"Usually what one would suspect as airline companies merge together is that they will get more power over the market and have less competition," Gao said. "Monopolies tend to charge higher prices and sell less quantities than if it were a competitive market."

Gao found that merged airline companies disproportionately inflate the prices of already expensive tickets – such as first class tickets and those targeted toward business travelers -- to maximize their profits.

"The main result is that the more expensive tickets experience the biggest price increase whereas the cheap tickets don't experience as big of a change," Gao said.

Gao said his math and economics have all been helpful in preparing him for his research.

"The economics classes are more theory-driven," Gao said. "They're all pencil and paper, and you normally don’t do too much of that in research. It’s good to have the theoretical background. And the deeper you go into economic research, the more math I think you need."

Gao and Roberts' results have numerous policy implications because the Department of Justice uses economic research to make decisions about whether or not to approve mergers.

"The Department of Justice wants to protect the interest of the consumers, so they really want to draw from economic analyses," Gao said. "Our research can contribute to policy making in the future, and that definitely makes it feel very relevant."

Beyond classes and research, Gao is a member of the InterVarsity Christian Fellowship. In the fall he will apply to PhD programs in economics.