Airport privatization and
international competition
joint work with Noriaki Matsushima
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vertical relationship
Upstream Firm
Downstream Firm
Market
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Examples of Vertical Relationship
(1) Manufacturer ー Seller
(2) Input Supplier ー Final Product Supplier
(3) Wholesaler ー Retailer
(4) Patent Holder ー Producer
(5) MNO ー MVNO
(6) Airport ー Airline Company
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Double Marginalization
Suppose that both upstream and downstream firms
are monopolists.
Suppose that upstream firm adopts marginal cost
pricing.
→Downstream firm set monopoly price which
maximizing resulting joint profits of two firms.
However, profit-maximizing upstream firm set the
price higher than the marginal cost.
→Resulting final product price is higher than the jointprofit-maximizing one.
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How to solve double
marginalization problem
(1) Vertical Integration
(2) Vertical Control
(3) Two-Part Tariff
Fixed payment + Unit Payment ~ Price Discrimination
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competition between downstream
firms
Upstream Firm
Downstream Firm 1
Downstream Firm 2
Market
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competition between
downstream firms
Suppose that the upstream firm set the unit part is
equal to the marginal cost.
→The resulting price is lower than the joint-profit
maximizing monopoly price.
⇒(if downstream firms are symmetric), the upstream
firm sets a higher unit price so as to induce the
monopoly price.
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competition between
downstream firms
Upstream Firm
Downstream Firm 1
Market 1
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Additional transport
cost
Downstream Firm 2
Market 2
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Exclusive Territories
Firm 1 is not allowed to sell its product for market 2,
and firm 2 is not allowed to sell its product for
market 1.
→Restricting downstream competition
⇒Reducing supply cost (transport cost) yields lower
price and thus increases CS.
Matsumura (2003)
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Exclusive Territories
Upstream Firm
Downstream Firm 1
Market 1
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Downstream Firm 2
Market 2
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Competition between upstream
firms
Upstream
Firm 1
Downstream
Firm 1
Market 1
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Upstream
Firm 2
Downstream
Firm 2
Market 2
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Foreclosure
Upstream
Firm 1
Downstream
Firm 1
Integration Market 1
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Upstream
Firm 2
Downstream
Firm 2
Market 2
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Foreclosure
Upstream
Firm 1
Downstream
Firm 1
Integration Market 1
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Upstream
Firm 2
Downstream
Firm 2
Market 2
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Standard duopoly
Upstream
Firm 1
Downstream
Firm 1
Integration Market 1
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Upstream
Firm 2
Downstream
Firm 2
Market 2
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Airport Competition
Upstream Firm 1
(Airport 1)
Downstream
Firm 1
(Airline 1)
Market 1
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Upstream Firm 2
(Airport 2)
complementary
service
Downstream
Firm 2
(Airline 2)
Market 2
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The Model
(1) In the first stage, the governments choose
whether or not to privatize the airports
independently.
(2) In the second stage, airports set airport charges,
w1 and w2, independently.
(3) In the third stage, downstream firms choose
prices independently.
The cost for each downstream firm is w1+w2.
Airport i and airline i belong to the same country,
while airport i and airport j belong to the different
countries.
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Important property in the second
stage
Airport charge competition～strategic substitutes.
Lower airport charge of airport 1 increases the
demand and so increases the best response of
airport 2.
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Important property in the first stage
Privatized airport sets a higher airport charge and
yields a lower airport charge of the rival. The lower
airport charge of the rival is beneficial for both
consumers and airline. →the government has an
incentive for privatization of its airport.
The privatization of the rival airport increases the
incentive for privatization. ~smaller market, smaller
incentive for decreasing the final product price.
Strategic complementarity in privatization stage.
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Important property in the first stage
Larger country (with larger market) has a stronger
incentive for privatization because the public airport
in the larger market country sets a lower airport
charge when both airports are public, resulting a
welfare loss (the larger surplus is obtained by the
foreign airline).
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