Air-rail cooperation : partnership level, market structure and welfare implications

Abstract

We build a theoretical model to study different air-rail cooperation scenarios. We investigate two possible air-rail partnerships between a rail operator and either a domestic airline or a foreign airline. When a partnership is formed, an investment to improve the air-rail connecting service is allowed at a cost before the service is launched. We find that the cooperation level, the equilibrium partnership scenarios when air-rail cooperation is exclusive or non-exclusive, as well as the comparisons of social welfare under different partnership scenarios, all depend on the pre-investment quality of air-rail service compared with the quality of air-air service. We further apply our model to the real-life case of Strasbourg-Paris-Dubai market, showing that other factors, such as price sensitivity of demand, horizontal differentiation between air and rail, and asymmetries in partnership investment costs, also affect cooperation level.