An Airport Pricing Versus Slots Game: The Case of Substitute Air Services

Abstract

Many passengers can choose among various destinations for their flight trips (for instance, a leisure trip from Asia to Europe or North America). The present study generalizes previous studies by incorporating substitute destination choices for origin-destination passengers into the analysis of equilibrium airport congestion policies involving slot or pricing policies. The results show that the presence of substitute destination choices is a necessary condition for equilibrium slot quantities to reach the first-best outcome that maximizes the welfare of all airport regions whereas equilibrium pricing levels will always be too high relative to the first-best prices independent of the presence or absence of substitute destination choices. Numerical examples indicate that the performance of pricing policies is better than slot policies in terms of relative welfare losses to the first-best outcome when the level of substitutability is relatively low or high. In the middle range of substitutability, the performance of slot policies is better than pricing policies and can even implement the first-best outcome.