Airlines' Strategic Interactions and Airport Pricing in a Dynamic Bottleneck Model of Congestion

Abstract:     
This paper analyzes airlines' strategic interactions and airport efficient pricing, with a deterministic bottleneck model of congestion, in Cournot-Nash competition and in sequential competition where a Stackelberg leader interacts with perfectly competitive airlines. We show that the internalization of self-imposed congestion by non-atomistic carriers is consistent with earlier literature based on static models of congestion, but the congestion tolls are not. The tolls derived for fully atomistic airlines achieve the social optimum, when charged to all carriers, in the simultanous setting as well as in the sequential setting. We also find that alternative efficient pricing schemes exist for the sequential competition between a dominant airline and a competitive follower. The analysis suggests that airport congestion pricing has a more signicant role than what previous studies have suggested. Moreover, the financial deficit under optimal pricing ma y be less severe than what earlier studies suggest, as congestion toll revenues may cover optimal capacity investments. Political feasibility would be enhanced as efficient congestion charges do not depend on market shares and therefore may not be perceived as inequitable.

Number of Pages in PDF File: 33

Keywords: Airport pricing, Congestion, Bottleneck model

JEL Classification: H23, L50, L93, R48

working papers series