ROUTE MONOPOLIES AND OPTIMAL NONLINEAR PRICING

To cope with air traffic growth and congested airports, two solutions are apparent on the supply side: 1) use larger aircraft in the hub and spoke system and (2) develop new routes through secondary airports. An enlarged route system through secondary airports may increase the proportion of route monopolies in the air transport market. The monopoly optimal nonlinear pricing policy is well known in the case of one dimension (one instrument, one characteristic) but not in the case of several dimensions. This paper explores the robustness of the one-dimensional screening model with respect to increasing the number of instruments and the number of characteristics. The objective of this paper is then to link and fill the gap in both literatures. One of the merits of the screening model has been to show that a great variety of economic questions could be handled within the same framework. The authors study a case of nonlinear pricing with two instruments, two routes on which the airline provides customers with services, two characteristics (demand of services on these routes) and two values per characteristic (low and high demand of services on these routes) and show that none of the conclusions of the one-dimensional analysis remain valid. In particular, upward incentive compatibility constraint may be binding at the optimum. As a consequence, there may be distortion at the top of the distribution. The authors also show that the optimal solution often requires a form of bundling, explain distortions, and show that it is sometimes optimal for the monopolists to only produce one good or to exclude some buyers from the market. This means that the monopolist cannot fully apply his monopoly power and is better off selling both goods independently. We then define all the possible solutions in the case of a quadratic cost function for a uniform distribution of agent types and explain the implications for airlines in terms of service differentiation.

• Corporate Authors:

  University of Nebraska, Omaha

  Aviation Institute, 60th and Dodge Street
  Omaha, NE  United States  68182-0508
• Authors:
  • Tournut, J
• Conference:
  • Air Transport Research Society World Conference
  • Location: Toulouse, France
  • Date: 2003-7-10 to 2003-7-12
• Publication Date: 2003-7

Language

• English

Media Info

• Features: Appendices; Figures; References;
• Pagination: 55p

Subject/Index Terms

• TRT Terms: Air routes; Airlines; Airports; Monopoly; Pricing; Travel demand
• Subject Areas: Aviation; Economics; Terminals and Facilities;

Filing Info

• Accession Number: 00977903
• Record Type: Publication
• Files: TRIS
• Created Date: Aug 2 2004 12:00AM