Quality-Driven Synergies in Horizontal Mergers: A Study of the U.S. Airline Industry

This dissertation comprises two chapters that examine firm integration decisions in Industrial Organization, focusing on horizontal, vertical, and conglomerate structures. The first chapter develops an empirical framework to examine how mergers generate synergies through endogenous product repositioning. It begins by estimating demand and cost structures, then simulates post-merger market equilibrium, allowing firms to optimize product quality and positioning endogenously. Using the JetBlue-Spirit merger as a case study, the analysis shows that simply combining the two firms does not generate synergies. Instead, quality-driven synergies arise from reallocating higher-quality services to large-city markets, where consumers place greater value on quality. The chapter also highlights the distributional implications of the merger for consumer welfare, with surplus shifting toward less price-sensitive consumers and large-city markets. The second chapter develops a theoretical model in which firms use integration strategies to mitigate return volatility from industry-specific shocks. When firms are risk-averse or risk-neutral but benefit from financial market advantages that are functionally equivalent to risk aversion, their ability to manage ex-post risks influences their ex-ante boundary choices. The model demonstrates that conglomeration stabilizes profits by diversifying exposure to demand shocks, while vertical integration reduces uncertainty from upstream price fluctuations. By analyzing both forms of integration within a unified framework, the chapter provides new insights into how risk considerations shape firm boundaries.