IDEAS home Printed from https://ideas.repec.org/p/tky/fseres/2005cf316.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2005/2005cf316.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. David Haugh & Tim Hazledine, 1999. "Oligopoly behaviour in the Trans-Tasman air travel market: The case of kiwi international," New Zealand Economic Papers, Taylor & Francis Journals, vol. 33(1), pages 1-25.
    2. Hooper, Paul, 2002. "Privatization of airports in Asia," Journal of Air Transport Management, Elsevier, vol. 8(5), pages 289-300.
    3. Gerald Granderson, 2000. "Regulation, Open-Access Transportation, and Productive Efficiency," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 16(3), pages 251-266, May.
    4. Gillen, David W. & Oum, Tae H. & Tretheway, Michael W., 1988. "Airport Pricing Policies: An Application to Canadian Airports," Journal of the Transportation Research Forum, Transportation Research Forum, vol. 29(1).
    5. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
    6. Windle, Robert & Dresner, Martin, 1999. "Competitive responses to low cost carrier entry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 35(1), pages 59-75, March.
    7. Barrett, Sean D., 2004. "How do the demands for airport services differ between full-service carriers and low-cost carriers?," Journal of Air Transport Management, Elsevier, vol. 10(1), pages 33-39.
    8. Barrett, Sean D, 2000. "Airport competition in the deregulated European aviation market," Journal of Air Transport Management, Elsevier, vol. 6(1), pages 13-27.
    9. Francis, Graham & Fidato, Alessandro & Humphreys, Ian, 2003. "Airport–airline interaction: the impact of low-cost carriers on two European airports," Journal of Air Transport Management, Elsevier, vol. 9(4), pages 267-273.
    10. David Starkie, 2001. "Reforming UK Airport Regulation," Journal of Transport Economics and Policy, University of Bath, vol. 35(1), pages 119-135, January.
    11. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: I. Overview and Nondiscriminatory Pricing," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 1-37, Spring.
    12. Tae Hoon Oum & Anming Zhang & Yimin Zhang, 2004. "Alternative Forms of Economic Regulation and their Efficiency Implications for Airports," Journal of Transport Economics and Policy, University of Bath, vol. 38(2), pages 217-246, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David Martimort & Guillaume Pommey & Jerome Pouyet, 2021. "How to Regulate Airports?," Working Papers hal-03328394, HAL.
    2. Martimort, David & Pommey, Guillaume & Pouyet, Jerome, 2022. "Optimal regulation design of airports: Investment incentives and impact of commercial services," Transportation Research Part B: Methodological, Elsevier, vol. 164(C), pages 25-44.
    3. Choi, Jong Hae & Park, Yonghwa & Wang, Kun & Xia, Wenyi, 2020. "Whether low-cost-carrier passengers spend more on duty-free goods at the airport? Evidence from Incheon International Airport," Journal of Air Transport Management, Elsevier, vol. 86(C).
    4. 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.
    5. Dziedzic, Marcin & Njoya, Eric T. & Warnock-Smith, David & Hubbard, Nick, 2020. "Determinants of air traffic volumes and structure at small European airports," Research in Transportation Economics, Elsevier, vol. 79(C).
    6. Czerny, Achim I. & Shi, Zijun & Zhang, Anming, 2016. "Can market power be controlled by regulation of core prices alone? An empirical analysis of airport demand and car rental price," Transportation Research Part A: Policy and Practice, Elsevier, vol. 91(C), pages 260-272.
    7. Xiao, Yi-bin & Fu, Xiaowen & Oum, Tae H. & Yan, Jia, 2017. "Modeling airport capacity choice with real options," Transportation Research Part B: Methodological, Elsevier, vol. 100(C), pages 93-114.
    8. Oster, Clinton & Strong, John, 2021. "Economic effects of shifting airport activity in the Los Angeles metro region," Research in Transportation Economics, Elsevier, vol. 88(C).
    9. Choo, Yap Yin & Corbo, Leonardo & Wang, Kun, 2018. "Joint impact of airline market structure and airport ownership on airport market power and profit margin," Transport Policy, Elsevier, vol. 72(C), pages 67-78.
    10. Robert Malina & Sascha Albers & Nathalie Kroll, 2012. "Airport Incentive Programmes: A European Perspective," Transport Reviews, Taylor & Francis Journals, vol. 32(4), pages 435-453, April.
    11. Lei, Zheng & Papatheodorou, Andreas, 2010. "Measuring the effect of low-cost carriers on regional airports' commercial revenue," Research in Transportation Economics, Elsevier, vol. 26(1), pages 37-43.
    12. Abbruzzo, Antonino & Fasone, Vincenzo & Scuderi, Raffaele, 2016. "Operational and financial performance of Italian airport companies: A dynamic graphical model," Transport Policy, Elsevier, vol. 52(C), pages 231-237.
    13. Choo, Yap Yin & Oum, Tae Hoon, 2013. "Impacts of low cost carrier services on efficiency of the major U.S. airports," Journal of Air Transport Management, Elsevier, vol. 33(C), pages 60-67.
    14. Tiziana D'Alfonso & Valentina Bracaglia & Yulai Wan, 2015. "Airport cities and multiproduct pricing," DIAG Technical Reports 2015-14, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    15. Chiuling Lu & Ann Yang & Jui-Feng Huang, 2015. "Bankruptcy predictions for U.S. air carrier operations: a study of financial data," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 574-589, July.
    16. Choi, Jong Hae, 2021. "Changes in airport operating procedures and implications for airport strategies post-COVID-19," Journal of Air Transport Management, Elsevier, vol. 94(C).
    17. Kidokoro, Yukihiro & Lin, Ming Hsin & Zhang, Anming, 2016. "A general-equilibrium analysis of airport pricing, capacity, and regulation," Journal of Urban Economics, Elsevier, vol. 96(C), pages 142-155.
    18. Aasheesh Dixit & Patanjal Kumar & Suresh Jakhar, 2021. "Airport-Airline Coordination with Economic, Environmental and Social Considerations," Papers 2110.11694, arXiv.org.
    19. Cho, Woohyun & Windle, Robert J. & Dresner, Martin E., 2015. "The impact of low-cost carriers on airport choice in the US: A case study of the Washington–Baltimore region," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 81(C), pages 141-157.
    20. Basso, Leonardo J., 2008. "Airport deregulation: Effects on pricing and capacity," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 1015-1031, July.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2005cf316. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CIRJE administrative office (email available below). General contact details of provider: https://edirc.repec.org/data/ritokjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.