Scarcity, Market Power, and Prices at Slot-constrained Airports: Evidence from Mexico City
Journal of Transport Economics and Policy, Volume 53, Part 2, April 2019, pp. 119–134
In a paper published in the Journal of Transport Economics and Policy, an Analysis Group team offers a methodology for disentangling sources of ticket pricing pressures at congested airports. The paper “Scarcity, Market Power, and Prices at Slot-constrained Airports: Evidence from Mexico City” – written by Principal Almudena Arcelus, Managing Principal Jee-Yeon Lehmann, Vice President Federico Mantovanelli, and affiliate Robert S. Pindyck – draws on the authors’ experience analyzing the potential price effects of the slot allocation system used to assign take-off and landing times to different airlines at Benito Juarez International Airport in Mexico City.
Developing appropriate policy solutions for high airfares at congested airports depends on the ability to correctly identify the sources of pricing pressures. The authors show how a difference-in-differences estimator – a common methodology in economics used to isolate the causal effect of a policy or a treatment – can be used to disentangle the pricing effects of slot allocation at congested airports. In particular, they develop a methodology to separately identify market-dependent pricing pressure produced by slot constraints (when demand for take-off and landing assignments exceeds capacity) from the context-dependent effects of slot concentration (when a single airline controls a large share of slots), and from the potential exercise of market power by the dominant airline.
Ultimately, the authors argue that it is critical for industry regulators and administrators to understand whether higher prices at congested airports are the result of slot scarcity or slot concentration as they weigh different policy prescriptions for potential price effects of congestion at many of the world’s major airports.