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A note on optimal airport pricing in a hub-and-spoke system

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  • Oum, Tae Hoon
  • Zhang, Anming
  • Zhang, Yimin
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    Abstract

    This paper deals with the socially optimal pricing of airports in a hub-and-spoke network, taking into account explicitly the fact that demands for airport services at hub airport and spoke airports are complementary. It is shown that a welfare gain is to be made by switching from the regime of pricing each airport independently of other airports in the network to the regime of pricing the hub and spoke airports jointly. Intuitively, given the demand complementarity, the optimal pricing of a hub-and-spoke airport network as a system may require for the hub airport to subsidize the money-losing spoke airports. Our result implies that there may be a welfare loss due to the reduction in allocation efficiency if a network of airports currently being managed by a national government are to be defederalized (or privatized) separately for each airport as being carried out in Canada and in Australia. Since one of the major reasons for defederalization (or privatization) of airports is to reduce x-inefficiency caused by the centralized, bureaucratic and inflexible management, the welfare loss due to the allocative inefficiency should be weighed against the one-time gain in x-efficiency expected from defederalization of those airports. This result calls for a caution on the current debate on airport devolution which focuses mainly on the expected one-time reduction in x-inefficiency in airport operation and management and the need for flexible attitude toward local community needs, without even discussing its effects on reduced allocative efficiency which will continue to occur in perpetuity.

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    Bibliographic Info

    Article provided by Elsevier in its journal Transportation Research Part B: Methodological.

    Volume (Year): 30 (1996)
    Issue (Month): 1 (February)
    Pages: 11-18

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    Handle: RePEc:eee:transb:v:30:y:1996:i:1:p:11-18

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Oum, Tae Hoon & Zhang, Yimin, 1990. "Airport pricing : Congestion tolls, lumpy investment, and cost recovery," Journal of Public Economics, Elsevier, vol. 43(3), pages 353-374, December.
    2. Glaister, Stephen, 1974. "Generalised Consumer Surplus and Public Transport Pricing," Economic Journal, Royal Economic Society, vol. 84(336), pages 849-67, December.
    3. Carlin, Alan & Park, Rolla Edward, 1970. "Marginal Cost Pricing of Airport Runway Capacity," American Economic Review, American Economic Association, vol. 60(3), pages 310-19, June.
    4. Keeler, Theodore E & Small, Kenneth A, 1977. "Optimal Peak-Load Pricing, Investment, and Service Levels on Urban Expressways," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 1-25, February.
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    Cited by:
    1. Adler, Nicole & Berechman, Joseph, 2001. "Evaluating optimal multi-hub networks in a deregulated aviation market with an application to Western Europe," Transportation Research Part A: Policy and Practice, Elsevier, vol. 35(5), pages 373-390, June.
    2. Nakagawa, Dai & Aoyama, Yoshitaka & Ito, Tadashi & Nishizawa, Hiroyuki, 2005. "Assessment of passenger benefits brought about by international airport projects," Transport Policy, Elsevier, vol. 12(6), pages 512-524, November.
    3. Czerny, Achim I., 2010. "Airport congestion management under uncertainty," Transportation Research Part B: Methodological, Elsevier, vol. 44(3), pages 371-380, March.
    4. Park, Jong-Hun & Zhang, Anming & Zhang, Yimin, 2001. "Analytical models of international alliances in the airline industry," Transportation Research Part B: Methodological, Elsevier, vol. 35(9), pages 865-886, November.
    5. Pels, Eric & Nijkamp, Peter & Rietveld, Piet, 2000. "Airport and Airline Competition for Passengers Departing from a Large Metropolitan Area," Journal of Urban Economics, Elsevier, vol. 48(1), pages 29-45, July.
    6. Mantin, Benny, 2012. "Airport complementarity: Private vs. government ownership and welfare gravitation," Transportation Research Part B: Methodological, Elsevier, vol. 46(3), pages 381-388.
    7. Lin, Ming Hsin, 2013. "Airport privatization in congested hub–spoke networks," Transportation Research Part B: Methodological, Elsevier, vol. 54(C), pages 51-67.
    8. Zhang, Anming & Zhang, Yimin, 2006. "Airport capacity and congestion when carriers have market power," Journal of Urban Economics, Elsevier, vol. 60(2), pages 229-247, September.
    9. Barbot, Cristina, 2009. "Airport and airlines competition: Incentives for vertical collusion," Transportation Research Part B: Methodological, Elsevier, vol. 43(10), pages 952-965, December.
    10. Benoot, W. & Brueckner, J.K. & Proost, S., 2013. "Intercontinental-airport regulation," Transportation Research Part B: Methodological, Elsevier, vol. 52(C), pages 56-72.

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