Optimal Pricing of Flights and Passengers at Congested Airports: The Efficiency of Atomistic Charges

Tinbergen Institute Discussion Paper No. 11-179/3

21 Pages Posted: 23 Dec 2011

See all articles by Hugo E Silva

Hugo E Silva

VU University Amsterdam

Erik T. Verhoef

VU University Amsterdam - Department of Spatial Economics; Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Date Written: December 19, 2011

Abstract

This paper investigates optimal airport pricing when airlines provide imperfect substitutes products, and make decisions on capacity, scheduling and pricing. We show that the first-best toll per flight may be higher than the simple market-shares formula that were recently derived for Cournot models, and approaches the atomistic toll (which ignores the airlines' internalization of self-imposed congestion) as products become closer substitutes. This increases the relevance of congestion pricing and does not require leadership behavior. We also find that an airport requires two pricing instruments to achieve the first-best outcome: per-passenger subsidies to counteract airlines' market power, and per-flight tolls to correct congestion externalities. We numerically analyze second-best policies of having only one tax instrument, as well as the performance of atomistic pricing, and find that the latter may offer a more attractive alternative than what is suggested by simpler Cournot models.

Keywords: airport pricing, congestion internalization, atomistic tolls

JEL Classification: H21, H23, L13, L93, R48

Suggested Citation

Silva, Hugo E and Verhoef, Erik T., Optimal Pricing of Flights and Passengers at Congested Airports: The Efficiency of Atomistic Charges (December 19, 2011). Tinbergen Institute Discussion Paper No. 11-179/3, Available at SSRN: https://ssrn.com/abstract=1975739 or http://dx.doi.org/10.2139/ssrn.1975739

Hugo E Silva (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Erik T. Verhoef

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 020 4446094 (Phone)
+31 020 4446004 (Fax)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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