The assessment of market power of hub airports

Author-Highlights
• A framework for the assessment of market power of hub airports is proposed.
• We build a bridge between the theoretical analysis of airport related topics in industrial organization, and their application to policy making in practice.
• The key issues considered are definition of the relevant markets with respect to services and geography; factors that affect airport's market power; and potential effects of exercise of market power by hub airport.

Airport regulation regimes are under revision in many countries. The decision about the extent of airport regulation is based on an economic analysis of market power, which is done in two steps. The first step involves defining the relevant markets the airport is operating on. This in turn is based on an economic analysis of the particular circumstances of the airport, and must be compatible with competition law. The second step consists of the evaluation of the airport's competitive position in all identified markets. Due to industry particularities, many diverse issues must be taken into account in this process, such as questions of upstream and downstream market interaction, airport congestion, peak-load pricing, or offsetting bargaining power. Many of these questions have been theoretically analyzed in the industrial organization literature, but have only rarely been applied in practical competition analysis with respect to airports. This paper builds a bridge between the theoretical insights and their practical application to airport regulation policy. We derive the principles for a sound economic analysis of the market power of airports, given the time and data constraints encountered in practice by the regulatory authorities and other involved parties, and propose a general framework for the analysis of market power of airports. We focus on hub airports, as the analysis of these gateways covers all the relevant issues, including countervailing power of the hub operator.