Market failure or market efficiency?: Evidence on airport slot usage

Abstract

Beginning in 1986, the FAA has allowed the rights to take off or land at the four “High Density Traffic Airports” (HDTAs), known as “slots,” to be sold or traded for any consideration. Opponents of this system have alleged that the slot markets are prone to various forms of “market failure.” The main allegations have been that dominant carriers at the HDTAs have been “hoarding” slots in order to generate higher than competitive prices for airline services. This article attempts to test empirically the various anticompetitive hoarding hypotheses by examining slot ownership and usage data at the most concentrated HDTA, Chicago's O’Hare airport. In general, we find a positive and significant relationship between the rate at which a carrier uses a slot and the carrier's market share. This is consistent with a theory of efficient use of slots by carriers owning a large share of the slots at a HDTA. In addition, there is no evidence that the two largest carriers are using leasing as an anticompetitive device. On the other hand, our results concerning capacity usage are consistent with both hoarding and efficiency hypotheses. Taken as a whole, however, the statistical evidence presented here is more consistent with the hypothesis that efficiency considerations were generating concentration at O’Hare.