Benefits and costs of vertical agreements between airlines and high speed rail operators

There are many examples of airline-high speed rail vertical agreements, where the airline buys train seats to sell the multimodal product. We discuss the formation of such agreements, depending on the sunk costs of cooperation and firms’ bargaining power, and their welfare effects, depending on hub airport capacity and mode substitution. We argue that, contrary to mergers, vertical agreements largely benefit passengers. We propose a simple test as a ‘safe harbor’, which provides a sufficient condition for consumer surplus to be higher under vertical agreements. It may be optimal to subsidize desirable agreements when they are not incentive-compatible for firms.