In granting (or prohibiting) proposed acquisitions or mergers in an industry, government regulators consider a number of factors, including the acquisition's effect on concentration, ease of entry into the market, extent of ongoing price competition, and potential efficiency gains. In 1985, the Department of Transportation allowed United Airlines to acquire Pan American World Airways Pacific Division, including its U.S.-Japan routes. Before the acquisition, market shares on routes between the United States and Japan were Japan Airlines (30 percent). Northwest (30 percent), Pan Am (19 percent), and United (7 percent), with four other carriers accounting for the remaining 14 percent. Entry by new airlines along these routes was difficult and expensive. Nonetheless, price competition (due in large part to United's efforts to gain market share) was substantial.

a. What would be the (approximate) effect of the acquisition on the market's concentration ratio? On the HHI?

b. At the time, a Justice Department guideline called for prohibition of an acquisition that would raise HHI by more than 100 points in industries that already are highly concentrated (defined as a starting HHI exceeding 1,800). How would this guideline apply to United Airlines' proposed acquisition?

c. The Department of Transportation recognized that United's acquisition would integrate its domestic route network with the newly acquired Pacific routes. Would this make United a stronger competitor? Would route integration be beneficial to airline travelers?