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Airport deregulation: Effects on pricing and capacity

  • Basso, Leonardo J.
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    We use a model of vertical relations between two congestible airports and an airline oligopoly to examine, both analytically and numerically, how deregulation may affect airports prices and capacities. We find that: (i) unregulated profit-maximizing airports would overcharge for the congestion externality and, compared to the first-best, would induce large allocative inefficiencies and dead-weight losses. They would restrict capacity investments but, overall, would induce fewer delays; (ii) Welfare maximization subject to cost recovery performs quite well, achieving congestion levels similar to a private-unregulated airport but without inducing such large traffic contraction; this puts a question mark on the desirability of deregulation of private airports; (iii) Increased cooperation between airlines and airports provides some improvements, but the resulting airport pricing strategy leads to a downstream airline cartel; (iv) When schedule delay costs effects are strong and airline differentiation is weak, it may be optimal to have a single airline dominating the airports, but this happens only when airports' pricing schemes render the number of airlines irrelevant for competition.

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    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 26 (2008)
    Issue (Month): 4 (July)
    Pages: 1015-1031

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    Handle: RePEc:eee:indorg:v:26:y:2008:i:4:p:1015-1031
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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