Airport Deregulation: Effects on Pricing and Capacity

Abstract

It has been argued in the literature that privatized airports would charge more efficient congestion prices and would be more responsive to market incentives for capacity expansions. Furthermore, privatized airports would not need to be regulated since price elasticities are low, so allocative inefficiencies would be small, and collaboration between airlines and airports may solve the problem of airports' market power. We use a model of vertical relations between two congestible airports and an airline oligopoly, to examine, both analytically and numerically, how deregulation may affect airports prices and capacities. We find that: (i) unregulated profit-maximizing airports would overcharge for the congestion externality and, compared to the first-best, would induce large allocative inefficiencies and dead-weight losses. They would restrict capacity investments but, overall, would induce fewer delays; (ii) Welfare maximization subject to cost recovery performs fairly well, both in terms of allocative efficiency and congestion management, lending some support to a non for profit organization scheme and putting a question mark on the desirability of deregulation of private airports; (iii) Increased cooperation between airlines and airports provides some improvements, but the resulting airport pricing strategy leads to a downstream airline cartel; (iv) When schedule delay costs effects are strong and airline differentiation is weak, it may be optimal to have a single airline dominating the airports, but this happens only when airports' pricing schemes render the number of airlines irrelevant for competition.