Vertical relations in the air transport industry: A facility-rivalry game

This paper investigates contracts between airports and airlines, in the context of two competing facilities and three types of agreements. The downstream market consists in a route operated by one leader and n − 1 followers competing à la Stackelberg in each facility. We develop a multistage game where each airport and its dominant airline decide whether to enter into a contract and which one to engage in. We find that the airport and its dominant airline have incentives to collude in each facility. Nevertheless, the equilibrium is not efficient in terms of social welfare: there is a misalignment between private and social incentives.

► Three vertical contracts are analysed both in airports and airlines competition. ► Airports and airlines can have incentive to a specific contract: vertical collusion. ► Vertical collusion is less efficient than price discrimination in terms of welfare. ► There is a misalignment between social and private incentives.