Market Structure, Countervailing Power and Price Discrimination: The Case of Airports

34 Pages Posted: 10 Dec 2010  

Jonathan Haskel

Imperial College Business School

Alberto Iozzi

Universita degli Studi di Roma

Tommaso M. Valletti

Imperial College Business School; University of Rome, Tor Vergata - Department of Financial and Quantitative Economics; Centre for Economic Policy Research (CEPR)

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Date Written: December 9, 2010

Abstract

We study bargained input prices where up and downstream firms can choose alternative vertical partners. We apply our model to bargained airport landing fees where a number of interesting policy questions have arisen. For example, what is the impact of joint ownership of airports? Does airline countervailing power stop airports raising fees? Should airports be prohibited, as an EU directive intends, from charging differential prices to airlines? Our major findings are (a) an increase in upstream concentration or in the substitutability between airports always increases the landing fee; (b) the effect of countervailing power, via an increase in downstream concentration, depends on the competition regime between airlines and whether airports can price discriminate: airline concentration reduces the landing fee when downstream competition is in quantities, but if downstream competition is in prices only where airports cannot discriminate. Furthermore, only in a specific case (Bertrand competition, uniform landing fees and undifferentiated goods) will lower fees pass through to consumers. (c) With Cournot competition, uniform landing fees are always higher than discriminatory fees, while the reverse is true with Bertrand competition. We also look at the incentives for airport expansion which raise quantities of passengers paying a given landing fee, but alters the nature of airline competition, which changes the landing fee.

Keywords: Airports, Airlines, Landing Fees, Countervailing Power

JEL Classification: D43, L13, L93, R48

Suggested Citation

Haskel, Jonathan and Iozzi, Alberto and Valletti, Tommaso M., Market Structure, Countervailing Power and Price Discrimination: The Case of Airports (December 9, 2010). CEIS Working Paper No. 177. Available at SSRN: https://ssrn.com/abstract=1722652 or http://dx.doi.org/10.2139/ssrn.1722652

Jonathan E. Haskel

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Alberto Iozzi (Contact Author)

Universita degli Studi di Roma ( email )

Via Columbia n.2
Rome, rome 00100
Italy
39 06 7259 5923 (Phone)
39 06 204 02 19 (Fax)

Tommaso M. Valletti

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

University of Rome, Tor Vergata - Department of Financial and Quantitative Economics ( email )

Via Columbia n.2
Roma, 00133
Italy

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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