Vertical Agreements Between Airports and Carriers

Abstract

This paper investigates vertical contracts between airports and airlines, in the context of two competing facilities and three different types of agreements. The downstream market consists in a route operated by one leader and n-1 follower competing à la Stackelberg in each airport. In this sense, the paper adds to literature as it considers the issue of vertical contracts both in the airports competition and airlines competition. We develop a multistage facility-rivalry game where each airport and the respective dominant airline decide whether to enter into a contract and, if so, which one to engage in. In this framework, we investigate the Nash equilibrium to analyse the incentives for vertical contracts: we find that the airport and the dominant airline have incentive to collude in each facility. Nevertheless, the equilibrium is not efficient in terms of social welfare, so that there is a misalignment between private and social incentives.