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When Hotelling meets Vickrey: Service timing and spatial asymmetry in the airline industry

Author

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  • André de Palma
  • Carlos Ordás Criado
  • Laingo M. Randrianarisoa

Abstract

This paper analyzes rivalry between transport facilities in a model that includes two sources of horizontal differentiation: geographical space and departure time. We explore how both sources influence facility fees and the price of the service offered by downstream carriers. Travellers’ costs include a fare, a transportation cost to the facility and a schedule delay cost, which captures the monetary cost of departing earlier or later than desired. One carrier operates at each facility and schedules a single departure time. The interactions in the facility-carrier model are represented as a sequential three-stage game in fees, times and fares with simultaneous choices at each stage. We find that duopolistic competition leads to an identical departure time across carriers when their operational cost does not vary with the time of day, but generally leads to distinct service times when this cost is time dependent. When a facility possesses a location advantage, it can set a higher fee and its downstream carrier can charge a higher fare. Departure time differentiation allows the facilities and their carrier to compete along an additional differentiation dimension that can reduce or strengthen the advantage in location. By incorporating the downstream carriers into the analysis, we also find that a higher per passenger commercial revenue at one facility induces a lower fee charged by both facilities to their carrier and a lower fare charged by both carriers at their departure facility, while a lower marginal operational cost for one carrier implies a higher fee at its departure facility, a lower fee at the other facility served by the rival carrier and a lower fare at both facilities.

Suggested Citation

  • André de Palma & Carlos Ordás Criado & Laingo M. Randrianarisoa, 2017. "When Hotelling meets Vickrey: Service timing and spatial asymmetry in the airline industry," Cahiers de recherche CREATE 2017-01, CREATE.
  • Handle: RePEc:lvl:creacr:2017-01
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    References listed on IDEAS

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    3. Brueckner, Jan K. & Flores-Fillol, Ricardo, 2020. "Market structure and quality determination for complementary products: Alliances and service quality in the airline industry," International Journal of Industrial Organization, Elsevier, vol. 68(C).
    4. Jan K. Brueckner & Ricardo Flores-Fillol, 2018. "Airline Alliances and Service Quality," CESifo Working Paper Series 7226, CESifo.
    5. Li Cheng & Liu Conglin, 2023. "Game analysis and pricing strategy of duopoly airlines based on service," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 14(3), pages 1103-1124, June.
    6. Wan, Xi & Zou, Benteng, 2024. "Multi-product airport competition and optimal airport charges," Research in Transportation Economics, Elsevier, vol. 103(C).
    7. Xi Wan & Benteng Zou, 2020. "Airport Competition in Two-sided Markets," DEM Discussion Paper Series 20-01, Department of Economics at the University of Luxembourg.
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    More about this item

    Keywords

    Airline and facility competition; Horizontal differentiation; Location model; Spatial asymmetry; Service timing.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • R4 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics

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