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Airlines' Strategic Interactions and Airport Pricing in a Dynamic Bottleneck Model of Congestion

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  • Hugo E. Silva

    (VU University Amsterdam)

  • Erik T. Verhoef

    (VU University Amsterdam)

  • Vincent A.C. van den Berg

    ()
    (VU University Amsterdam)

Abstract

This paper analyzes efficient pricing at a congested airport dominated by a single firm. Unlike much of the previous literature, we combine a dynamic (bottleneck) model of congestion and a vertical structure model that explicitly considers the role of airlines and passengers. We show that when a Stackelberg leader interacts with a competitive fringe, charging the congestion toll that is derived for fully atomistic carriers to both leader and fringe yields the first-best outcome. This holds regardless of the leader's internalization of congestion in the unregulated equilibrium, and regardless of the assumed demand substitution pattern between firms. This result implies that the financial deficit under optimal pricing may be less severe than what earlier studies suggest. Finally, we show that there are various alternative toll regimes that also induce the welfare maximizing outcome, and therefore widen the set of choices for regulators.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-056/3.

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Date of creation: 25 May 2012
Date of revision: 15 Jul 2013
Handle: RePEc:dgr:uvatin:20120056

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

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Keywords: Airport pricing; Congestion; Bottleneck model;

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