OT2012 1

Airport privatization and international competition

joint work with Noriaki Matsushima

OT2012　 2

vertical relationship

Upstream Firm

Downstream Firm

Market

OT2012　 3

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

OT2012 　 4

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 joint-profit-maximizing one.

OT2012 　 5

How to solve double marginalization problem

(1) Vertical Integration(2) Vertical Control (3) Two-Part TariffFixed payment + Unit Payment ~ Price

Discrimination

OT2012 　 6

competition between downstream firms

Upstream Firm

Downstream Firm 1

Market

Downstream Firm 2

OT2012 　 7

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.

OT2012 　 8

competition between downstream firms

Upstream Firm

Downstream Firm 1

Market 1

Downstream Firm 2

Market 2

Additional transport cost

OT2012 　 9

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)

OT2012 　 10

Exclusive Territories

Upstream Firm

Downstream Firm 1

Market 1

Downstream Firm 2

Market 2

OT2012　 11

Competition between upstream firms

Upstream Firm 1

Downstream Firm 1 　

Market 1

Downstream Firm 2

Market 2

Upstream Firm 2

OT2012　 12

Foreclosure

Upstream Firm 1

Downstream Firm 1 　

Market 1

Downstream Firm 2

Market 2

Upstream Firm 2

Integration

OT2012　 13

Foreclosure

Upstream Firm 1

Downstream Firm 1 　

Market 1

Downstream Firm 2

Market 2

Upstream Firm 2

Integration

OT2012　 14

Standard duopoly

Upstream Firm 1

Downstream Firm 1 　

Market 1

Downstream Firm 2

Market 2

Upstream Firm 2

Integration

OT2012　 15

Airport Competition

Upstream Firm 1

(Airport 1)

Downstream Firm 1 　(Airline 1)

Market 1

Downstream Firm 2(Airline 2)

Market 2

Upstream Firm 2

(Airport 2)complementary service

OT2012 　 16

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.

OT2012 　 17

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.

OT2012 　 18

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.

OT2012 　 19

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).