How Does Market Size Affect Vertical Structure When Considering Vertical Coordination? Application to the Railway Industry

We provide a theoretical framework to discuss the relation between market size and vertical structure in the railway industry. The framework is based on a simple downstream monopoly model with two input suppliers: the labour force and the rail infrastructure firm. The operation of the downstream firm (i.e. the train operating firm) imposes costs on the rail infrastructure firm. We show that the downstream firm with a larger market size is more likely to integrate with the rail infrastructure firm. This is consistent with the phenomenon in the railway industry.