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A note on optimal airport pricing in a hub-and-spoke system

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  • Oum, Tae Hoon
  • Zhang, Anming
  • Zhang, Yimin

Abstract

This paper deals with the socially optimal pricing of airports in a hub-and-spoke network, taking into account explicitly the fact that demands for airport services at hub airport and spoke airports are complementary. It is shown that a welfare gain is to be made by switching from the regime of pricing each airport independently of other airports in the network to the regime of pricing the hub and spoke airports jointly. Intuitively, given the demand complementarity, the optimal pricing of a hub-and-spoke airport network as a system may require for the hub airport to subsidize the money-losing spoke airports. Our result implies that there may be a welfare loss due to the reduction in allocation efficiency if a network of airports currently being managed by a national government are to be defederalized (or privatized) separately for each airport as being carried out in Canada and in Australia. Since one of the major reasons for defederalization (or privatization) of airports is to reduce x-inefficiency caused by the centralized, bureaucratic and inflexible management, the welfare loss due to the allocative inefficiency should be weighed against the one-time gain in x-efficiency expected from defederalization of those airports. This result calls for a caution on the current debate on airport devolution which focuses mainly on the expected one-time reduction in x-inefficiency in airport operation and management and the need for flexible attitude toward local community needs, without even discussing its effects on reduced allocative efficiency which will continue to occur in perpetuity.

Suggested Citation

  • Oum, Tae Hoon & Zhang, Anming & Zhang, Yimin, 1996. "A note on optimal airport pricing in a hub-and-spoke system," Transportation Research Part B: Methodological, Elsevier, vol. 30(1), pages 11-18, February.
  • Handle: RePEc:eee:transb:v:30:y:1996:i:1:p:11-18
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    References listed on IDEAS

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    1. Glaister, Stephen, 1974. "Generalised Consumer Surplus and Public Transport Pricing," Economic Journal, Royal Economic Society, vol. 84(336), pages 849-867, December.
    2. Keeler, Theodore E & Small, Kenneth A, 1977. "Optimal Peak-Load Pricing, Investment, and Service Levels on Urban Expressways," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 1-25, February.
    3. Carlin, Alan & Park, Rolla Edward, 1970. "Marginal Cost Pricing of Airport Runway Capacity," American Economic Review, American Economic Association, vol. 60(3), pages 310-319, June.
    4. Oum, Tae Hoon & Zhang, Yimin, 1990. "Airport pricing : Congestion tolls, lumpy investment, and cost recovery," Journal of Public Economics, Elsevier, vol. 43(3), pages 353-374, December.
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    Citations

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    Cited by:

    1. Zheng, Shiyuan & Negenborn, Rudy R., 2014. "Centralization or decentralization: A comparative analysis of port regulation modes," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 69(C), pages 21-40.
    2. Lin, Ming Hsin & Zhang, Anming, 2016. "Hub congestion pricing: Discriminatory passenger charges," Economics of Transportation, Elsevier, vol. 5(C), pages 37-48.
    3. Adler, Nicole & Berechman, Joseph, 2001. "Evaluating optimal multi-hub networks in a deregulated aviation market with an application to Western Europe," Transportation Research Part A: Policy and Practice, Elsevier, vol. 35(5), pages 373-390, June.
    4. Teraji, Yusuke & Morimoto, Yu, 2014. "Price competition of airports and its effect on the airline network," Economics of Transportation, Elsevier, vol. 3(1), pages 45-57.
    5. Lin, Ming Hsin, 2013. "Airport privatization in congested hub–spoke networks," Transportation Research Part B: Methodological, Elsevier, vol. 54(C), pages 51-67.
    6. Zhang, Anming, 2005. "Competition Models of Strategic Alliances," Research in Transportation Economics, Elsevier, vol. 13(1), pages 75-100, January.
    7. Kita, Hideyuki & Koike, Atsushi & Tanimoto, Keishi, 2005. "Air Service Development of Local Airports and its Influence on the Formation of Aviation Networks," Research in Transportation Economics, Elsevier, vol. 13(1), pages 233-249, January.
    8. Zhang, Anming & Zhang, Yimin, 2001. "Airport charges and cost recovery: the long-run view," Journal of Air Transport Management, Elsevier, vol. 7(1), pages 75-78.
    9. Zhang, Anming & Zhang, Yimin, 2006. "Airport capacity and congestion when carriers have market power," Journal of Urban Economics, Elsevier, vol. 60(2), pages 229-247, September.
    10. repec:eee:transb:v:101:y:2017:i:c:p:89-106 is not listed on IDEAS
    11. Pels, Eric & Nijkamp, Peter & Rietveld, Piet, 2000. "Airport and Airline Competition for Passengers Departing from a Large Metropolitan Area," Journal of Urban Economics, Elsevier, vol. 48(1), pages 29-45, July.
    12. Park, Jong-Hun & Zhang, Anming & Zhang, Yimin, 2001. "Analytical models of international alliances in the airline industry," Transportation Research Part B: Methodological, Elsevier, vol. 35(9), pages 865-886, November.
    13. Nakagawa, Dai & Aoyama, Yoshitaka & Ito, Tadashi & Nishizawa, Hiroyuki, 2005. "Assessment of passenger benefits brought about by international airport projects," Transport Policy, Elsevier, vol. 12(6), pages 512-524, November.
    14. Yuen, Andrew & Zhang, Anming & Hui, Yer Van & Leung, Lawrence C. & Fung, Michael, 2017. "Is developing air cargo airports in the hinterland the way of the future?," Journal of Air Transport Management, Elsevier, vol. 61(C), pages 15-25.
    15. Barbot, Cristina, 2009. "Airport and airlines competition: Incentives for vertical collusion," Transportation Research Part B: Methodological, Elsevier, vol. 43(10), pages 952-965, December.
    16. Benoot, W. & Brueckner, J.K. & Proost, S., 2013. "Intercontinental-airport regulation," Transportation Research Part B: Methodological, Elsevier, vol. 52(C), pages 56-72.
    17. Eric Pels & Peter Nijkamp & Piet Rietveld, 1998. "Equilibrium Airfares, Frequencies and Airport Taxes in a Multiple Airport Region: An Application of the Nested Logit Demand Model," Tinbergen Institute Discussion Papers 98-073/3, Tinbergen Institute.
    18. Czerny, Achim I., 2010. "Airport congestion management under uncertainty," Transportation Research Part B: Methodological, Elsevier, vol. 44(3), pages 371-380, March.
    19. Mantin, Benny, 2012. "Airport complementarity: Private vs. government ownership and welfare gravitation," Transportation Research Part B: Methodological, Elsevier, vol. 46(3), pages 381-388.
    20. repec:eee:transb:v:110:y:2018:i:c:p:137-159 is not listed on IDEAS
    21. Zhang, Anming & Zhang, Yimin, 2003. "Airport charges and capacity expansion: effects of concessions and privatization," Journal of Urban Economics, Elsevier, vol. 53(1), pages 54-75, January.

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