Author: Dr. Akhil Rao

Publisher: arXiv (working paper)

Publication Date: July 11, 2026

Link: https://arxiv.org/abs/2607.10385

Rational Futures Chief Economist, Dr. Akhil Rao, developed a stylized economic model of competition and vertical integration between launch providers and satellite constellations to explain a recurring question in the U.S. launch market: why, when standard learning-by-doing calculations suggest Falcon 9 launch costs should have fallen roughly 70% between 2012 and 2026, did the advertised per-launch price fall less than 6% in real terms. The model treats the launch market as a game of price competition between a capacity-constrained integrated launcher and an unconstrained rival, with constellations competing in quantities downstream. The paper uses this framework to show how vertical integration converts launch cost reductions into rents on scarce capacity rather than lower prices for external customers, potentially raising the price of space access across the sector. The results suggest assessments of competition in the launch sector need to account for the full scope of business lines that launch providers pursue and how they compete in non-launch sectors.

Findings

• Vertical integration enlarges the captive constellation, and any resulting cost reductions are captured as rent rather than passed through. Removing double marginalization lets the integrated firm’s constellation grow larger than its non-integrated rival, potentially generating greater flight experience and lower launch costs through learning-by-doing. Because a launch sold externally is a launch not flown for the firm’s own constellation, these cost savings are absorbed as a rent on scarce launch capacity. The launch price external customers pay is unaffected by the integrated launcher’s costs.
• Integration can raise the equilibrium launch price even with a competitor in the market. The integrated launcher prices external launches at its opportunity cost (the downstream profit it forgoes) and reduces the supply it offers external customers. This leaves more residual demand for the non-integrated launcher to monopolize, pushing the market price up. High profitability in one downstream segment can therefore raise the price of space access across all satellite markets.
• The same capacity rent has asymmetric effects on entry. The rent held in the launch segment can attract new launch providers, while the expanded captive constellation deters entry into the constellation segment. This may create a recurring pattern of launch entrants attracted by rents but unable to achieve scale, as the integrated firm’s downstream expansion limits the demand available to them.