Airlines' Strategic Interactions and Airport Pricing in a Dynamic Bottleneck Model of Congestion

Tinbergen Institute Discussion Paper 12-056/3

35 Pages Posted: 29 May 2012 Last revised: 18 Jul 2013

See all articles by Hugo E Silva

Hugo E Silva

VU University Amsterdam

Erik T. Verhoef

VU University Amsterdam - Department of Spatial Economics; Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Vincent A.C. van den Berg

VU University Amsterdam; Tinbergen Institute

Date Written: July 15, 2013

Abstract

This paper analyzes efficient pricing at a congested airport dominated by a single firm. Unlike much of the previous literature, we combine a dynamic (bottleneck) model of congestion and a vertical structure model that explicitly considers the role of airlines and passengers. We show that when a Stackelberg leader interacts with a competitive fringe, charging the congestion toll that is derived for fully atomistic carriers to both leader and fringe yields the first-best outcome. This holds regardless of the leader's internalization of congestion in the unregulated equilibrium, and regardless of the assumed demand substitution pattern between firms. This result implies that the financial deficit under optimal pricing may be less severe than what earlier studies suggest. Finally, we show that there are various alternative toll regimes that also induce the welfare maximizing outcome, and therefore widen the set of choices for regulators.

Keywords: Airport pricing, Congestion, Bottleneck model

JEL Classification: H23, L50, L93, R48

Suggested Citation

Silva, Hugo E and Verhoef, Erik T. and van den Berg, Vincent A.C., Airlines' Strategic Interactions and Airport Pricing in a Dynamic Bottleneck Model of Congestion (July 15, 2013). Tinbergen Institute Discussion Paper 12-056/3, Available at SSRN: https://ssrn.com/abstract=2069862 or http://dx.doi.org/10.2139/ssrn.2069862

Hugo E Silva (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

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

Vincent A.C. van den Berg

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

HOME PAGE: http://www.feweb.vu.nl/nl/afdelingen-en-instituten/spatial-economics/staff/v-berg/index.asp

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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