Airport Pricing: Network Congestion Pricing with Market Power and Endogenous Network Structures

Tinbergen Institute 2002-078/3

33 Pages Posted: 28 Oct 2002

See all articles by Eric A. J. H. Pels

Eric A. J. H. Pels

Vrije Universiteit - Department of Spatial Economic

Erik T. Verhoef

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

Date Written: 2002

Abstract

Conventional economic wisdom suggests that congestion pricing would be an appropriate response to cope with the growing congestion levels currently experienced at many airports. Several characteristics of aviation markets, however, may make naive congestion prices equal to the value of marginal travel delays a non-optimal response. This paper develops a model of airport pricing that captures a number of these features. The model in particular reflects (1) that airlines typically have market power and are engaged in oligopolistic competition at different sub-markets; (2) that part of external travel delays that aircraft impose are internal to an operator and hence should not be accounted for in congestion tolls; (3) that the airlines' consumers may impose external benefits of increased frequencies upon one-another; (4) that different airports in an international network will typically not be regulated by the same authority; and (5) that an individual airline's network will not be exogenous but may instead be affected by congestion levels and tolls, which may create discontinuities. We present an analytical treatment for an undetermined number of nodes, links and operators in a network of undetermined size and shape, and some numerical exercises for a small triangular network. Some main conclusions are that second-best optimal tolls are typically lower than what would be suggested by congestion costs alone and may even be negative, that pricing may induce changes in network configurations, and that cooperation between regulators need not be stable but that non-cooperation may lead to welfare losses, also when compared to a no-tolling situation.

Keywords: aviation, network pricing, congestion, second-best

JEL Classification: R41, R48, D62

Suggested Citation

Pels, Eric A.J.H. and Verhoef, Erik T., Airport Pricing: Network Congestion Pricing with Market Power and Endogenous Network Structures (2002). Tinbergen Institute 2002-078/3, Available at SSRN: https://ssrn.com/abstract=324840 or http://dx.doi.org/10.2139/ssrn.324840

Eric A.J.H. Pels (Contact Author)

Vrije Universiteit - Department of Spatial Economic ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31-20-4446049 (Phone)
+31-20-4446004 (Fax)

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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