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The Role of Airline Frequency Competition in Airport Congestion Pricing Vikrant Vaze vikrantv@mit.edu Cynthia Barnhart Department of Civil and Environmental Engineering, Massachusetts Institute of Technology Abstract: Airport congestion pricing has often been advocated as a means of controlling demand for airport operations and for achieving efficient resource allocation. Competition between airlines affects the extent to which an airline would be willing to pay for airport slots. Accurate modeling of competition is critical in order to determine the effectiveness of a congestion pricing mechanism. We develop an equilibrium model of airline frequency competition in the presence of delay costs and congestion prices. Using a small hypothetical network, we evaluate the impacts of congestion prices on the various stakeholders and investigate the dependence of effectiveness of congestion pricing on the characteristics of frequency competition in individual markets. We find that the effectiveness of congestion pricing critically depends on three essential parameters of frequency competition. Our results show that variation in the number of passengers per flight plays a vital role in determining the degree of attractiveness of congestion pricing to the airlines. A significant part of the impact of congestion pricing cannot be accounted for using the models in prior literature, which are based on the assumptions of constant load factors and constant aircraft sizes. Further, we find that, in comparison to flat pricing, marginal cost pricing is more effective in reducing congestion without penalizing the airlines with exceedingly high congestion prices. Draft completed August 29th, 2011. 1. BACKGROUND With airport capacity being a scarce resource, market-based mechanisms such as congestion pricing and slot auctions are expected to bring demand and supply in balance by placing monetary prices on the airport capacity. These market-based mechanisms rely on the ability of the airlines to assess the economical value of airport slots, while bidding for slots in the case of auctions and for determining the demand for slots at a given level of prices in the case of congestion pricing. Airlines are typically assumed to be rational decision makers, each driven by its own profit-maximization objective. However, an airline needs to account for competition from other airlines operating in the same markets as it does, while ascertaining its own valuation of an airport slot. In this paper, we model the airline frequency decisions under congestion pricing through explicit modeling of competition and assess the dependence of the effectiveness, or lack thereof, of congestion pricing on the characteristics of airline markets. Many prior studies have accounted for airline competition using conventional micro-economic models of firm TRB 2012 Annual Meeting Paper revised from original submittal.
