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

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.