Airport Pricing

Conventional economic wisdom suggests that congestion pricing would be an appropriate response to cope with the growing congestion levels currently experienced at many airports. Several characteristics of aviation markets, however, may make naive congestion prices equal to the value of marginal travel delays a non-optimal response. This paper develops a model of airport pricing that captures a number of these features. The model reflects (1) that airlines typically have market power; (2) that part of external travel delays that aircraft impose are internal to an operator; (3) that the airlines' consumers may impose external benefits of increased frequencies upon one-another; (4) that airports need not be regulated by the same authority; and (5) that an individual airline's network will not be exogenous. We present an analytical treatment for an undetermined number of nodes, links and operators in a network of undetermined size and shape, and numerical exercises for a small triangular network. Some main conclusions are that second-best optimal tolls are typically below marginal external congestion costs alone and may even be negative, that pricing may induce changes in network configurations, and that cooperation between regulators need not be stable but that non-cooperation may lead to welfare losses, also when compared to a no-tolling situation.