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Optimal Pricing of Flights and Passengers at Congested Airports: The Efficiency of Atomistic Charges

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Author Info

  • Hugo E. Silva

    (VU University Amsterdam)

  • Erik T. Verhoef

    (VU University Amsterdam)

Abstract

This paper investigates optimal airport pricing when airlines provide imperfect substitutes products, and make decisions on capacity, scheduling and pricing. We show that the first-best toll per flight may be higher than the simple market-shares formulae that were recently derived for Cournot models, and approaches the atomistic toll (which ignores the airlines' internalization of self-imposed congestion) as products become closer substitutes. This increases the relevance of congestion pricing and does not require leadership behavior. We also find that an airport requires two pricing instruments to achieve the first-best outcome: per-passenger subsidies to counteract airlines' market power, and per-flight tolls to correct congestion externalities. We numerically analyze second-best policies of having only one tax instrument, as well as the performance of atomistic pricing, and find that the latter may offer a more attractive alternative than what is suggested by simpler Cournot models.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-179/3.

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Date of creation: 22 Dec 2011
Date of revision: 28 Mar 2013
Handle: RePEc:dgr:uvatin:20110179

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Web page: http://www.tinbergen.nl

Related research

Keywords: Airport pricing; Congestion internalization; Atomistic tolls;

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References

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  1. Jan Brueckner & Ricardo Flores-Fillol, 2007. "Airline Schedule Competition," Review of Industrial Organization, Springer, vol. 30(3), pages 161-177, May.
  2. Santos, Georgina & Robin, Maƫl, 2010. "Determinants of delays at European airports," Transportation Research Part B: Methodological, Elsevier, vol. 44(3), pages 392-403, March.
  3. Martijn Brons & Eric Pels & Peter Nijkamp & Piet Rietveld, 2001. "Price Elasticities of Demand for Passenger Air Travel," Tinbergen Institute Discussion Papers 01-047/3, Tinbergen Institute.
  4. Perloff,Jeffrey M. & Karp,Larry S. & Golan,Amos, 2007. "Estimating Market Power and Strategies," Cambridge Books, Cambridge University Press, number 9780521011143, November.
  5. Eric Pels & Erik Verhoef, 2003. "The Economics of Airport Congestion Pricing," Tinbergen Institute Discussion Papers 03-083/3, Tinbergen Institute.
  6. Rupp, Nicholas G., 2009. "Do carriers internalize congestion costs? Empirical evidence on the internalization question," Journal of Urban Economics, Elsevier, vol. 65(1), pages 24-37, January.
  7. Brons, Martijn & Pels, Eric & Nijkamp, Peter & Rietveld, Piet, 2002. "Price elasticities of demand for passenger air travel: a meta-analysis," Journal of Air Transport Management, Elsevier, vol. 8(3), pages 165-175.
  8. Flores-Fillol, Ricardo, 2010. "Congested hubs," Transportation Research Part B: Methodological, Elsevier, vol. 44(3), pages 358-370, March.
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