ABSTRACT
The reason for regulating utility industries, such as airports, has been to curb market power. However, economic regulation introduces its own distortions and at the end of the day there is a trade-off to be made between imperfect competition and imperfect regulation. Because the balance between the two imperfections can change, the need for economic regulation should be re-examined from time to time. In the airport industry, circumstances have changed in recent years in a way that suggests that competition is now more important. The chapter then considers market power in the airport industry and suggests that this stems largely from the problems of gaining access to suitable competing sites and from the agglomeration economies of the air service network. Nevertheless, there are opportunities for substituting different airports but the degree to which this is possible depends upon the particular circumstances. The chapter then puts forward a model of airport competition in a spatial context that suggests that price competition can extend beyond overlapping catchment areas and that substitutability is too narrow a criterion for judging market power. There is also some competition from surface modes of transport and international air service agreements can sometimes constrain the ability of airports to exploit their market power. Attention is then drawn to some structural features of the industry that are unusual. It is suggested that these provide an incentive for airports not to exploit their market power. It has also been suggested that even if airports exploit their market power, the adverse economic costs might be small. Finally, the paper concludes by considering again the balance to be struck between the economic effects of some market power and the potential distortions of regulatory intervention.
