The Economics of Airport Congestion Pricing

Tinbergen Institute Discussion Paper No. 03-083/3

29 Pages Posted: 18 Nov 2003

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

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Date Written: October 10, 2003

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; and (3) that different airports in an international network will typically not be regulated by the same authority. We present an analytical treatment for a simple two-node network and some numerical results to illustrate our findings. 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, 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: congestion, market power, networks, airports, airlines

JEL Classification: R41, R48, L93

Suggested Citation

Pels, Eric A.J.H. and Verhoef, Erik T., The Economics of Airport Congestion Pricing (October 10, 2003). Tinbergen Institute Discussion Paper No. 03-083/3, Available at SSRN: https://ssrn.com/abstract=459502 or http://dx.doi.org/10.2139/ssrn.459502

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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