Marginal costs estimation and market power of German airports

From a theoretical prospective, marginal costs are one of the main determinants of pricing policy. However, their complexity and to some extend the artificiality of marginal costs makes the concept very unpopular among practitioners, also in the aviation industry. Nevertheless, in this paper we aim to estimate cost functions for German airports and derive marginal costs for different types of aircraft using them. This allows us to make efficiency comparison for aeronautical activities. Moreover, using the results of Morrison (1982), we are also able to estimate the “k” coefficients of the Ramsey-pricing formula and then use it as a proxy for market power of these airports. As the result we obtain two rankings from the sample: the first is the cost efficiency ranking of airports, and the second ranking is with respect to market power.