Prices and Competition in Vertically Integrated Launch Markets

Over the last 15 years the number of U.S. orbital launches has grown by roughly an order of magnitude. About three-quarters of those launches were on SpaceX's Falcon 9 vehicle, and roughly three-fifths of those Falcon launches deployed SpaceX's own Starlink constellation. A back-of-envelope Wright's law calculation suggests this increase in experience should have driven the Falcon 9's real launch cost down by roughly 70\% over 2012--2026. Yet over the same period the advertised price fell by less than 6\% in real terms. Why? I develop a simple model of competition and vertical integration between launchers and constellations. The launch market is Bertrand; the constellation services market is Cournot; one launcher is integrated with its captive constellation. Three results follow. First, the removal of double marginalization raises the captive constellation's equilibrium size. If the integrated launcher obtains cost reductions from this experience, they are captured as capacity rent rather than passed through to external buyers. Second, the integrated launcher prices launches to be indifferent between serving internal and external demand, leaving more residual demand for a competing launcher to monopolize and pushing the equilibrium launch price up. Third, the same capacity rent that holds the equilibrium launch price up can attract entry to the launch segment, while the expansion of the captive constellation deters entry on the constellation side.