Identifying Merger Opportunities: The Case of Air Traffic Control

Horizontal mergers and acquisitions offerfirms the means to grow. However,forecasting these actions'potential effects on the market is not a simple task. We propose amodel that identifies optimal horizontal merger configurations for an industry. The modelendogenizes the merger choice by maximizing the overall potential efficiency gain at thelevel of an industry orfirm with multiple branches. We further extend the model to con-sider mergers that create contiguousfirms, should network effects be a consideration. Theoptimal solution, estimated as a consequence of a change in industry structure, is decom-posed into individual learning inefficiencies in addition to harmony and scale effects. Theefficiency gains are estimated using a nonradial, directional distance function to facilitatethis decomposition. An application of the model to the European air traffic control marketsuggests that the market ought to be reduced to 4 contiguousfirms, replacing the 29 ana-lyzed and the 9 proposed in the Single European Skies initiative. This is likely to lead tooverall savings of arounde3.3 billion annually, of which approximately 82% is directlyattributable to merger synergies. Furthermore, this represents an additional annual savingofe1.2 billion over that achieved by the second best: the Single European Skies initiativ