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An Analysis of Airport Pricing and Regulation in the Presence of Competition Between Full Service Airlines and Low Cost Carriers

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  • Tae Hoon Oum

    (Sauder School of Business, University of British Columbia)

  • Xiaowen Fu

    (University of British Columbia)

  • Mark Lijesen

    (CPB Netherlands Bureau for Economic Policy Analysis)

Abstract

Despite the airport privatization and deregulation trend in recent years, whether or not the privatized or commercialized airports should be left unregulated is still an open question. Related to this issue, one question that has received a very little attention to date is if and how pricing behavior of unregulated airports affect downstream airline competition, especially the competition between airlines offering differentiated services such as the case of full service airlines (FSA) vis-a-vis low cost carriers (LCC). If the upstream monopoly (airport) hinders downstream (airline) competition, the welfare effects of the upstream unregulated monopoly may be much larger than initially suspected. This aspect of airport pricing has not been formally incorporated in the debate on airport price regulation. In this paper, we study a duopoly model to capture the differential competitive effects of changing airport user charges on FSAs and LCCs. By making reasonable assumptions on differential price elasticities, unit costs and competitive behavior as manifested by firmspecific conduct parameters, we perform numerical simulations to measure differential effects on an FSA and an LCC of increasing airside user charge by an unregulated upstream monopolist airport. Our analytical and numerical results suggest existence of the asymmetric effects of an airport's monopoly pricing on LCC and FSA. That is, LCCs suffer more from an identical cost increase than FSAs and are, therefore, more vulnerable to monopolistic pricing practices of an unregulated airport. This implies that unregulated airport pricing would reduce the extent of competition in downstream airline markets, and thus, cause a further detrimental effect on welfare over and above the first-order dead weight loss of airport's monopolistic pricing. Considering that LCCs have brought considerable reduction of average fares and the associated welfare gains, it is important for the governments to take into account of these asymmetric effects of increasing airport user charges on FSAs and LCCs when they consider the form and extent of regulation or deregulation. Although our model and simulation work deal specifically with the effect of airport pricing on downstream airline markets, our framework of analysis may be applicable to analysis of any policy affecting costs of FSAs and LCCs including security levies as well as potentially adaptable to other upstream-downstream industry cases.

Suggested Citation

  • Tae Hoon Oum & Xiaowen Fu & Mark Lijesen, 2005. "An Analysis of Airport Pricing and Regulation in the Presence of Competition Between Full Service Airlines and Low Cost Carriers," CIRJE F-Series CIRJE-F-316, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2005cf316
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    References listed on IDEAS

    as
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    Cited by:

    1. Yip, Tsz Leung & Liu, John Jianhua & Fu, Xiaowen & Feng, Jiejian, 2014. "Modeling the effects of competition on seaport terminal awarding," Transport Policy, Elsevier, vol. 35(C), pages 341-349.
    2. Sheng, Dian & Li, Zhi-Chun & Xiao, Yi-bin & Fu, Xiaowen, 2015. "Slot auction in an airport network with demand uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 82(C), pages 79-100.
    3. Wang, Kun & Fu, Xiaowen & Luo, Meifeng, 2015. "Modeling the impacts of alternative emission trading schemes on international shipping," Transportation Research Part A: Policy and Practice, Elsevier, vol. 77(C), pages 35-49.
    4. Hideki Murakami, 2009. "Low-Cost Entry, Inter-Firm Rivalry, and Welfare Implications in US Large Air Markets," Discussion Papers 2009-25, Kobe University, Graduate School of Business Administration.
    5. Hideki Murakami, 2010. "Time Effect of Low-Cost Carrier Entry and Social Welfare in US Large Air Markets," Discussion Papers 2010-31, Kobe University, Graduate School of Business Administration.
    6. repec:gam:jsusta:v:10:y:2018:i:2:p:400-:d:130171 is not listed on IDEAS
    7. Fan, Terence Ping Ching & Tan, Alex Tai Loong & Geng, Xuesong, 2014. "Rapid capacity expansions and failure: A trap for new airline entrants?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 61(C), pages 176-191.
    8. repec:eee:trapol:v:63:y:2018:i:c:p:165-175 is not listed on IDEAS
    9. Hideki Murakami, 2008. "Low-Cost Entry, Inter-Firm Rivalry, and Welfare Implications in Large U.S. Air Markets," Discussion Papers 2008-36, Kobe University, Graduate School of Business Administration.
    10. repec:eee:trapol:v:59:y:2017:i:c:p:28-37 is not listed on IDEAS
    11. Hazledine, Tim, 2006. "Pricing and Competition in Australasian Air Travel Markets," Working Paper Series 3840, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    12. repec:eee:jaitra:v:64:y:2017:i:pb:p:101-112 is not listed on IDEAS
    13. Hangjun Yang & Anming Zhang, 2011. "Price-cap regulation of congested airports," Journal of Regulatory Economics, Springer, vol. 39(3), pages 293-312, June.
    14. de Rus, Ginés & Socorro, M. Pilar, 2014. "Access pricing, infrastructure investment and intermodal competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 70(C), pages 374-387.
    15. Adolf K.Y. Ng & Zaili Yang & Stephen Cahoon & Paul T.W. Lee & Winai Homosombat & Adolf K. Y. Ng & Xiaowen Fu, 2016. "Regional Transformation and Port Cluster Competition: The Case of the Pearl River Delta in South China," Growth and Change, Wiley Blackwell, vol. 47(3), pages 349-362, September.
    16. Wang, Fan & Zhuo, Xiaopo & Niu, Baozhuang & He, Jiayi, 2017. "Who canvasses for cargos? Incentive analysis and channel structure in a shipping supply chain," Transportation Research Part B: Methodological, Elsevier, vol. 97(C), pages 78-101.
    17. Hideki Murakami, 2012. "Dynamic Effect of Low-Cost Entry on the Conduct Parameter: An Early-Stage Analysis of Southwest Airlines and America West Airlines," Discussion Papers 2012-25, Kobe University, Graduate School of Business Administration.
    18. repec:eee:transb:v:101:y:2017:i:c:p:89-106 is not listed on IDEAS
    19. repec:eee:transb:v:100:y:2017:i:c:p:93-114 is not listed on IDEAS
    20. repec:eee:transb:v:104:y:2017:i:c:p:543-567 is not listed on IDEAS
    21. Li, Zhi-Chun & Lam, William H.K. & Wong, S.C. & Fu, Xiaowen, 2010. "Optimal route allocation in a liberalizing airline market," Transportation Research Part B: Methodological, Elsevier, vol. 44(7), pages 886-902, August.
    22. Yang, Hangjun & Fu, Xiaowen, 2015. "A comparison of price-cap and light-handed airport regulation with demand uncertainty," Transportation Research Part B: Methodological, Elsevier, vol. 73(C), pages 122-132.
    23. repec:eee:transa:v:103:y:2017:i:c:p:472-489 is not listed on IDEAS
    24. Germá Bel & Xavier Fageda, 2009. "Factors Explaining Charges in European Airports: Competition, Market Size, Private Ownership and Regulation," Working Papers 2009-31, FEDEA.
    25. Fu, Xiaowen & Homsombat, Winai & Oum, Tae H., 2011. "Airport–airline vertical relationships, their effects and regulatory policy implications," Journal of Air Transport Management, Elsevier, vol. 17(6), pages 347-353.

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