ABSTRACT
With the ongoing privatization of airports, it is essential to know how airport pricing and airport competition influence the outcome of airline competition. It is generally accepted that private railway companies and bus companies, and also infrastructure operators like airports, have some degree of market power, although the source of market power may not be straightforward. In the case of airports, Starkie (2001) argues that (some) airports may be 'locational monopolies' rather than natural monopolies. An often used argument is that the introduction of competition prevents the abuse of market power. However, following Kreps and Scheinkman (1983). we can assume that even when airports engage in price (Bertrand) competition, the commitment to a certain level of capacity eventually yields Cournot outcomes. Thus market power is 'abused' in the sense that prices are set above marginal costs. Moreover, airports that face a derived demand function will demand airport capacity because passengers demand trips. Even when airports are prevented from abusing market power by some form of regulation, welfare will not be maximized when airlines are still able to set prices above marginal costs.
