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

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. (C) 2017 Elsevier Ltd. All rights reserved.