Market Power of Hub Airports: The Role of Lock-In Effects and Downstream Competition

In this paper we develop a model of hub competition, which includes duopolistic Bertrand competition on the downstream market in order to analyze the incentives of hub airports to exploit market power in the transfer passenger market. We find evidence that downstream competition limits hub market power and moreover, that there are incentives for a hub airport and its respective network carrier to optimize profits of the overall network jointly. Therefore, strict economic regulation of the business relationship between hub airports and their respective network carrier is rendered unnecessary. Regulators should focus on supporting long-term profit sharing contracts of network carriers and hub airports or other contractual forms to ensure vertical cooperation.