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Why do contracts between airlines and airports fail?

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  • Barbot, Cristina
  • D'Alfonso, Tiziana

Abstract

We investigate the sustainability of vertical contracts between airports and airlines. We focus on the case of Quantity Forcing contracts, with a theoretical model that accommodates changes to the contracts' clauses or environments in a two period game, since contracts often include clauses that determine obligations for airlines and airports to be accomplished in more than a single period. We find that contracts – by which airlines commit to carry to the airport the quantity that maximizes joint profits and airports commit to advertise the airlines and to rebate charges – are not sustainable. The relationship holds for both the finite periods and a two period game, a situation similar to a Prisoner's Dilemma. Nevertheless, when there is uncertainty from demand fluctuations the Nash equilibrium of the game depends on the magnitude of the expected fall on demand and on the probability of the state of nature.

Suggested Citation

  • Barbot, Cristina & D'Alfonso, Tiziana, 2014. "Why do contracts between airlines and airports fail?," Research in Transportation Economics, Elsevier, vol. 45(C), pages 34-41.
  • Handle: RePEc:eee:retrec:v:45:y:2014:i:c:p:34-41
    DOI: 10.1016/j.retrec.2014.07.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Vertical contracts; Sustainability; Airports; Airlines; Policy;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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