Vertical Integration and Market Competition

Vertical integration occurs when one firm operates at two or more successive stages of a supply chain, such as owning essential airport infrastructure while also supplying airline services. It may improve coordination, investment and service quality, but it can also give the integrated firm the ability and incentive to disadvantage downstream rivals that depend on its infrastructure. Such integration is not inherently anti-competitive; concern arises when market power at one stage is used to restrict competition at another.

How vertical integration affects competition

An airport is an upstream platform supplying infrastructure and related services to airlines, which compete downstream for passengers and cargo. The competitive effect of common ownership depends on the availability of alternative infrastructure, capacity constraints, entry barriers, the operator's market power and whether efficiencies outweigh likely harm.

• Integration can reduce transaction and coordination costs between infrastructure and downstream operations.
• It can support investment, scheduling coordination, service innovation and consistent quality.
• Competition risks are greater when downstream rivals cannot realistically substitute another facility or enter the market without access to the integrated infrastructure.
• Market power or dominance, rather than vertical integration by itself, is central to the assessment of competitive harm.

Foreclosure and discriminatory access

Vertical foreclosure occurs when an integrated firm uses its control over one stage of the supply chain to weaken competitors at another stage. It can be total, through denial of access, or partial, through access on terms that make rivals less competitive.

• Input foreclosure arises when the infrastructure owner refuses, restricts or raises the cost of access needed by rival downstream firms.
• Non-price discrimination may involve inferior access, inconvenient timings or locations, delays, lower service quality or less favourable operational treatment in matters under the operator's control.
• Price discrimination may involve charging similarly placed rival users more, or granting preferential rebates and commercial terms to the affiliated downstream service.
• Customer foreclosure arises when the integrated downstream business directs substantial demand towards its own upstream affiliate, reducing the market available to competing upstream suppliers.
• Foreclosure can raise rivals' costs, deter entry, reduce service choice and ultimately weaken price and quality competition.
• Transparent, objective and uniformly applied access conditions can reduce the scope for discriminatory treatment.

Conflicts of interest and regulatory response

A conflict of interest exists when the infrastructure operator must act as a neutral gatekeeper for all users while also having a commercial interest in the success of its own downstream affiliate. The conflict does not by itself prove abuse, but it creates incentives for self-preferencing and requires scrutiny.

• The operator may favour its affiliate when allocating scarce capacity or operational facilities over which it has discretion.
• Commercially sensitive information obtained from rival users may benefit the affiliated downstream business unless effective information barriers exist.
• The operator may design access procedures, technical conditions or service standards that are easier for its affiliate to satisfy.
• Possible safeguards include non-discriminatory access rules, published criteria, independent allocation mechanisms, accounting or functional separation, information firewalls and regulatory oversight.
• Under Section 3(4) of the Competition Act, 2002, vertical agreements are examined where they cause or are likely to cause an appreciable adverse effect on competition.
• Section 4 prohibits abuse of a dominant position, including unfair or discriminatory conditions or prices, denial of market access and using dominance in one relevant market to enter into or protect another relevant market.
• For major airports, the Airports Economic Regulatory Authority regulates specified aeronautical tariffs and charges and monitors performance standards; sectoral regulation and competition law therefore address distinct but complementary concerns.

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