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Optimal pricing of flights and passengers at congested airports and the efficiency of atomistic charges

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  • Silva, Hugo E.
  • Verhoef, Erik T.

Abstract

This paper investigates and compares airport pricing policies under various types of competition, considering both per-passenger and per-flight charges at congested airports. We show that an airport requires both pricing instruments to achieve the first-best outcome, and we distinguish their role by showing that congestion externalities need to be addressed through per-flight tolls whereas the inefficiency caused by airlines' market power exertion must be corrected with per-passenger subsidies. We also show that Bertrand competition with differentiated products, a type of behavior recently pointed out by the empirical literature as pertinent, has policy implications that diverge from analyses that assume Cournot competition. The welfare gains and congestion reductions of congestion pricing would be higher than what has been advanced before; the degree of self-financing of airport infrastructure under optimal pricing would be increased and may approach exact self-financing; and the implied differentiation of charges between (asymmetric) airlines would be significantly smaller, presumably enhancing the political feasibility of welfare maximizing congestion pricing, as the potential distributional concerns would be decreased. Finally, we numerically analyze second-best policies, and find that atomistic pricing may offer a relatively attractive alternative to first-best congestion pricing.

Suggested Citation

  • Silva, Hugo E. & Verhoef, Erik T., 2013. "Optimal pricing of flights and passengers at congested airports and the efficiency of atomistic charges," Journal of Public Economics, Elsevier, vol. 106(C), pages 1-13.
  • Handle: RePEc:eee:pubeco:v:106:y:2013:i:c:p:1-13
    DOI: 10.1016/j.jpubeco.2013.06.007
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    References listed on IDEAS

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    Cited by:

    1. Silva, Hugo E. & Verhoef, Erik T. & van den Berg, Vincent A.C., 2014. "Airline route structure competition and network policy," Transportation Research Part B: Methodological, Elsevier, vol. 67(C), pages 320-343.
    2. Morimoto, Yu & Takeda, Kohei, 2015. "Policy of airline competition ~monopoly or duopoly~," MPRA Paper 63258, University Library of Munich, Germany.
    3. Lin, Ming Hsin & Zhang, Anming, 2016. "Hub congestion pricing: Discriminatory passenger charges," Economics of Transportation, Elsevier, vol. 5(C), pages 37-48.
    4. Lin, Ming Hsin, 2019. "Airport congestion and capacity when carriers are asymmetric," International Journal of Industrial Organization, Elsevier, vol. 62(C), pages 273-290.
    5. Guo, Huanxiu & Jiang, Changmin & Wan, Yulai, 2018. "Can airfares tell? An alternative empirical strategy for airport congestion internalization," Transportation Research Part A: Policy and Practice, Elsevier, vol. 118(C), pages 648-661.
    6. Lin, Ming Hsin & Zhang, Yimin, 2017. "Hub-airport congestion pricing and capacity investment," Transportation Research Part B: Methodological, Elsevier, vol. 101(C), pages 89-106.
    7. Federico Boffa & Alessandro Fedele & Alberto Iozzi, 2020. "Congestion and Incentives in the Age of Driverless Cars," CEIS Research Paper 484, Tor Vergata University, CEIS, revised 13 May 2020.
    8. Czerny, Achim I. & Zhang, Anming, 2014. "Airport congestion pricing when airlines price discriminate," Transportation Research Part B: Methodological, Elsevier, vol. 65(C), pages 77-89.
    9. Verhoef, Erik T., 2017. "Cost recovery of congested infrastructure under market power," Journal of Urban Economics, Elsevier, vol. 101(C), pages 45-56.
    10. Verhoef, Erik T. & Silva, Hugo E., 2017. "Dynamic equilibrium at a congestible facility under market power," Transportation Research Part B: Methodological, Elsevier, vol. 105(C), pages 174-192.
    11. Gillen, David & Jacquillat, Alexandre & Odoni, Amedeo R., 2016. "Airport demand management: The operations research and economics perspectives and potential synergies," Transportation Research Part A: Policy and Practice, Elsevier, vol. 94(C), pages 495-513.
    12. Czerny, Achim I. & Zhang, Anming, 2015. "How to mix per-flight and per-passenger based airport charges," Transportation Research Part A: Policy and Practice, Elsevier, vol. 71(C), pages 77-95.
    13. Hugo E. Silva & Robin Lindsey & André de Palma & Vincent A. C. van den Berg, 2017. "On the Existence and Uniqueness of Equilibrium in the Bottleneck Model with Atomic Users," Transportation Science, INFORMS, vol. 51(3), pages 863-881, August.
    14. Nicolas Coulombel & Guillaume Monchambert, 2019. "Congestion, diseconomies of scale and subsidies in urban public transportation," Working Papers hal-02373768, HAL.
    15. Vincent A.C. van den Berg & Henk Meurs & Erik T. Verhoef, 2020. "Business models for interoperable mobility services," Tinbergen Institute Discussion Papers 20-051/VIII, Tinbergen Institute.
    16. Czerny, Achim I. & Zhang, Anming, 2014. "Airport peak-load pricing revisited: The case of peak and uniform tolls," Economics of Transportation, Elsevier, vol. 3(1), pages 90-101.
    17. Babić, Danica & Kalić, Milica, 2018. "Modeling the selection of airline network structure in a competitive environment," Journal of Air Transport Management, Elsevier, vol. 66(C), pages 42-52.
    18. Czerny, Achim I. & Cowan, Simon & Zhang, Anming, 2017. "How to mix per-flight and per-passenger based airport charges: The oligopoly case," Transportation Research Part B: Methodological, Elsevier, vol. 104(C), pages 483-500.
    19. Liu, Shi-Miin & Chen, Hsiao-Chi & Han, Wenqing & Lin, Yen-Hung, 2018. "Optimal concession contracts for landlord port authorities to maximize fee revenues with minimal throughput requirements," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 109(C), pages 239-260.

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