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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.
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How to solve double marginalization problem
(1) Vertical Integration(2) Vertical Control (3) Two-Part TariffFixed payment + Unit Payment ~ Price
Discrimination
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competition between downstream firms
Upstream Firm
Downstream Firm 1
Market
Downstream Firm 2
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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
Downstream Firm 2
Market 2
Additional transport cost
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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
Downstream Firm 2
Market 2
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Competition between upstream firms
Upstream Firm 1
Downstream Firm 1
Market 1
Downstream Firm 2
Market 2
Upstream Firm 2
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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
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Standard duopoly
Upstream Firm 1
Downstream Firm 1
Market 1
Downstream Firm 2
Market 2
Upstream Firm 2
Integration
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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
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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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