Jonathan McClure presenting, "Markups and Costs under Capacity Constraints: the Welfare Effects of Hotel Mergers".

Abstract: Hotel chain mergers increase markups through market concentration, but also stand to decrease average costs through added efficiencies. The pass-through of these cost reductions to consumers—versus rising markups—leads to ambiguous welfare effects. This paper constructs an equilibrium model of the U.S. hospitality sector, incorporating a flexible model of costs which captures firm capacity constraints. I show that firms with larger hotel portfolios face lower average costs and softer capacity constraints when pproaching full occupancy. In hypothetical merger scenarios, I provide evidence for when efficiencies result in pro-competitive effects. A merger of large chains decreases average costs for merging firms (−12.7%) but harms consumer surplus (−2.0%), while the acquisition of an independent hotel modestly decreases average costs (−2.8%) while raising consumer surplus (0.1%) as efficiencies are passed through.