Abstract

In this paper, we study airport decisions on pricing and capacity investment with both aeronautical and concession operations. In addition, the airport under consideration is serving air carriers who have market power. We find that a profit-maximizing airport would over-invest in capacity in the sense that the marginal (social) benefit of capacity is smaller than the marginal (social) cost. This tendency of overinvestment still holds when the private airport is under the regulatory constraint of cost recovery in its aeronautical operation (the dual-till regulation). We also find that the capacity investment by a public airport will be socially efficient in the sense that the marginal benefit of capacity is equal to the marginal cost of capacity. However, somewhat surprisingly, the capacity investment of the public airport will be inefficient if it is under regulatory constraints. Specifically, the airport will also over-invest in capacity, whether it is under a single-till regulation or a dual-till regulation. Finally, it is noteworthy that the inefficiency in airport investment is driven by the interaction between the airport and the carriers who have market power.

Keyword

AIRLINE INDUSTRY ;  Airport charges ;  BEHAVIOR ;  Capacity investment financing ;  CARRIERS ;  Commercial revenue ;  DELAYS ;  EXPANSION ;  INTERNALIZATION ;  Market power ;  MARKET POWER ;  OLIGOPOLY ;  Regulation

Abstract

This paper examines the classical seat allocation problem under competition between two airlines with different cost structure. The cost asymmetry that has been ignored in the yield management literature can be caused by either operations or distributions. We investigate the decision problem of two airlines offering two identical fare classes under both the simultaneous and sequential allocations. For both allocation cases, we show the existence, uniqueness and stability of pure-strategy Nash equilibrium under a reasonable condition on the ratios of relative profit margins of the two fare classes. We find that there will be fewer seats protected for the full-fare class if the discount seats can be booked first. We found that the asymmetry in costs has two effects on the equilibrium solutions: (a) an airline behaves aggressively for the fare class where it enjoys a cost advantage; (b) an airline tends to balance the trade-offs internally when it has absolute cost advantage in both fare classes. In deriving the collusive solution for both cases for comparative purposes, we discover new insights by solving the two-flight, two-fare seat allocation problem with different cost structures on the two flights. In particular, we show that rivalry in full-fare seat protection leads to a Prisoners' Dilemma for the carriers. Finally, a numerical example is used to illustrate various analytical results.

Keyword

Abstract

Several authors recently pointed out that congestion pricing has no (or only partial) place at an airport when carriers have market power, since carriers themselves will internalize congestion. This article investigates the impact of such self-internalization on the airport, as this would effectively deprive the airport of an important source of funds for its capacity investment. We find that airline market structure has no impact on airport capacity and congestion for a welfare-maximizing airport that receives public subsidy, while somewhat surprisingly, both a private airport and a budget-constrained public airport would tend to over-invest in capacity when carriers have market power.

Keyword

Airports ;  Capacity investment and financing ;  Congestion toll ;  Market power

Abstract

Rivalry between strategic alliances is investigated in a model where each alliance member maximizes its own profit and some share of its partner's profit. A complementary alliance confers a strategic advantage by allowing the partners to credibly commit to greater output, owing to both within-alliance complementarities and cross-alliance substitutabilities. Although rivalry between different alliances can sometimes lead to a Prisoners' Dilemma for firms, it tends to improve economic welfare. On the other hand, an alliance that arises due purely to the threat of entry may reduce welfare.

Keyword

AIRLINE INDUSTRY ;  Competing strategic alliances ;  CONDUCT ;  ENTRY-DETERRENCE ;  EQUILIBRIUM ;  HORIZONTAL MERGERS ;  International airline alliances ;  MARKETS ;  OLIGOPOLY ;  Partial alliance ;  R-AND-D ;  Supermodularity