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Airport Using Forward Contracts to Reduce Regulatory Capture


  • Felix Höffler
  • Sebastian Kranz


A fully unbundled, regulated network frm of unknown efficiency level can undertake unobservable effort to increase the likelihood of low downstream prices, e.g., by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can propose to the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but receives the expected value of the contracts when selling them to a competitive financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic probability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.

Suggested Citation

  • Felix Höffler & Sebastian Kranz, 2010. "Airport Using Forward Contracts to Reduce Regulatory Capture," WHU Working Paper Series - Economics Group 10-02, WHU - Otto Beisheim School of Management.
  • Handle: RePEc:whu:wpaper:10-02

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    References listed on IDEAS

    1. Brueckner, Jan K. & Van Dender, Kurt, 2008. "Atomistic congestion tolls at concentrated airports? Seeking a unified view in the internalization debate," Journal of Urban Economics, Elsevier, vol. 64(2), pages 288-295, September.
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    5. 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.
    6. Basso, Leonardo J. & Zhang, Anming, 2010. "Pricing vs. slot policies when airport profits matter," Transportation Research Part B: Methodological, Elsevier, vol. 44(3), pages 381-391, March.
    7. Pels, Eric & Verhoef, Erik T., 2004. "The economics of airport congestion pricing," Journal of Urban Economics, Elsevier, vol. 55(2), pages 257-277, March.
    8. Hazledine, Tim, 2006. "Price discrimination in Cournot-Nash oligopoly," Economics Letters, Elsevier, vol. 93(3), pages 413-420, December.
    9. Brueckner, Jan K., 2009. "Price vs. quantity-based approaches to airport congestion management," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 681-690, June.
    10. Christopher Mayer & Todd Sinai, 2003. "Network Effects, Congestion Externalities, and Air Traffic Delays: Or Why Not All Delays Are Evil," American Economic Review, American Economic Association, vol. 93(4), pages 1194-1215, September.
    11. Morrison, Steven A., 1987. "The equity and efficiency of runway pricing," Journal of Public Economics, Elsevier, vol. 34(1), pages 45-60, October.
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    More about this item


    Incentive regulation; regulatory capture; virtual power plants;

    JEL classification:

    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities


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