Vertical differentiation between airline and high-speed rail : the effects on intermodal competition and cooperation

Among the few papers that have studied intermodal competition and cooperation between high-speed rail (HSR) and airlines from an analytical point of view, it is assumed that the two modes are horizontally differentiated. However, empirical evidence seems to suggest that the two modes are vertically differentiated. The aim of this thesis is to study the effects of vertical differentiation between HSR and airlines on fares, traffic volumes and social welfare. The analysis is done for both competition and cooperation scenarios, and is conducted in an asymmetric network with hub airport runways being potentially capacity constrained. We find that an improvement in rail speed or air-rail connecting time will lead to a decrease of air fare on the routes where HSR and airlines compete. Furthermore, HSR-airlines competition in the connecting markets may result in airlines charging higher-than-monopoly price in the markets where HSR is not present. Although HSR-airlines cooperation can eliminate this kind of negative impacts, cooperation harms social welfare in the markets where HSR and airlines are both present. Intermodal cooperation benefits some markets while disadvantaging others. In terms of overall social welfare in the network, we suggest that intermodal cooperation should be encouraged if (1) the markets, where air transport is the only mode, are much larger than the other markets; or (2) the connecting markets are much larger than the other markets and airlines cannot serve all markets in the network due to insufficient hub airport runway capacity. Otherwise, intermodal competition should be encouraged.Business, Sauder School ofGraduat