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

Abstract

This paper analyzes rivalry between transport facilities in a model that includes two sources of horizontal differentiation: geographical location and departure time. We explore how both sources influence facility fees and the price of the service offered by downstream carriers. Travelers’ costs include a fare, a transportation cost to the facility and a schedule delay cost. The interactions in the facility-carrier model are represented as a sequential three-stage game in fees, times and fares. Duopolistic competition leads to an identical departure time across carriers when their operating costs do not vary with the time of day, but generally leads to distinct service times when this cost is time-dependent. We also find that 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 operating cost for one carrier implies a higher fee at its departure facility, a lower fee at the rival carrier’s facility and a lower fare at both facilities. Finally, we show that the socially optimal schedule differentiation decreases in the distance between facilities and in the unit transportation cost incurred by travelers, and increases in the unit schedule delay cost incurred by travelers as well as in the marginal time cost faced by carriers.