Download Introduction and overview of ongoing research issues

Introduction and overview of
ongoing research issues
GAP Research Workshop Berlin, April 10 2008
Hans-Martin Niemeier
University of Applied Sciences, Bremen
Prof. Dr. Hans-Martin
Niemeier
1
Theory of Optimal Pricing of Airports
I. Theory of Marginal Cost Pricing
• Efficient rationing of existing capacity
• Optimal level of investment
• Allocative efficiency and welfare maximization
• Cost efficiency
II. Second best pricing for airports
• Small non busy airports with decreasing average costs
• Airports with increasing average costs
• Busy and very busy airports
III.Summary and further research
Prof. Dr. Hans-Martin
Niemeier
2
I. Theory of Marginal Cost Pricing
Marshallian Equilibrium Analysis
P
SRMC
P1
SRAC
P2
P3
LRAC
D
X1
X2
X3
Output
Prof. Dr. Hans-Martin
Niemeier
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I. Theory of Marginal Cost Pricing
Marshallian Equilibrium Analysis
•
Marginal cost pricing leads to an efficient
rationing of existing capacities. The users are
charged with the opportunity cost to produce
the demanded output. Historical costs do not
matter. The output is distributed to those with
the greatest willingness to pay.
Prof. Dr. Hans-Martin
Niemeier
4
I. Theory of Marginal Cost Pricing
Marshallian Equilibrium Analysis
•
•
•
Marginal cost pricing leads to an optimal level of
investment. The firms are indifferent in their decision to
use more fixed or variable capital.
Marginal cost pricing leads to allocative efficiency as
welfare is maximized. The social marginal benefit of
producing the last output unit equals its social marginal
costs.
Marginal cost pricing leads to cost efficiency. Output is
produced at the minimum of average costs. All returns
scale are exhausted. The firms are producing technically
efficient and using an efficient combinations of
production factors.
Prof. Dr. Hans-Martin
Niemeier
5
Small airports: Deficit problem
P
Loss
pR-AC(QR)
AC(Q)
popt
MC(Q)
D
QR
Q
Prof. Dr. Hans-Martin
Niemeier
6
Small airports: Deficit problem
Second best solutions
• What is second best? Price and quantity combination
maximizing consumer and producer surplus subject to
the airport breaking even.
• Price at marginal cost plus subsidy.
• Single product airport: Price at average cost. Higher
prices, lower consumer surplus.
• Multiproduct airport: Two-part tariffs or Ramsey
Pricing.
Prof. Dr. Hans-Martin
Niemeier
7
Small airports: Deficit problem
Ramsey Pricing
• Start from p= MC
• Optimize trade off. Raising price
• increases profitability and break even
• decreases welfare (or increases deadweight loss)
• Assumption: Independent Demand for two products.
Cross price elasticities are zero.
• Two products have the same MC.
• How price then two products?
Prof. Dr. Hans-Martin
Niemeier
8
Small airports: Deficit problem
Ramsey Pricing
• The airport should mark up the price above marginal
cost inversely to the price elasticity of demand.
• Have airport charges a Ramsey pricing structure?
• Pros and cons of weight based charges
Prof. Dr. Hans-Martin
Niemeier
9
Airports with increasing AC
Pricing of weak airport monopolies
• While the small airports might be strong natural
monopolies large hubs have lost this status and became
legal monopolies as entry has been blocked by the
authorities.
• These airports are operating under constant or even
slight increasing long run average costs but demand
might not be strong enough two sustain two airports.
Prof. Dr. Hans-Martin
Niemeier
10
Airports with increasing AC
P
MC(Q)
AC(Q)
MC2
p2
p1
c*
D2
MC1
D1
q*
Q
Prof. Dr. Hans-Martin
Niemeier
11
Airports with increasing AC
Pricing of weak airport monopolies
• Marginal cost pricing is possible as the welfare
maximising price covers costs.
• Profits should not be interpreted as a market failure.
• The monopoly is sustainable because entry is not
possible.
• Such an airport should not adopt Ramsey pricing.
• The structure of charges should reflect the marginal
costs of each product.
Prof. Dr. Hans-Martin
Niemeier
12
Airports with increasing AC
Pricing for busy and very busy airports
• Background
• Short run. Fixed capacity.
• Busy versus very busy airport
• What are the short run problems to implement
marginal cost pricing?
• What are the long run problems?
Prof. Dr. Hans-Martin
Niemeier
13
Background
• Excess demand for busy airports
• Charges are regulated at non-market clearing
levels leading to misallocation, queues and rents
• Ration by queues (US)
• Could ration by prices (but where?)
• Ration by slots (outside US)
• Allocate slots by grandfathering
• Limited slot trading leads to inefficient allocation
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Airports with increasing AC
Pricing for busy and very busy airports
• What are the short run problems to implement
marginal cost pricing?
• Set capacity at optimal level.
• Optimal price structure
• Optimal allocation system
Prof. Dr. Hans-Martin
Niemeier
15
Pricing under Regulation
• Regulation stops rationing prices from
being used
• Slots must be allocated
• Peak prices are irrelevant- slots do the
rationing
• But off peak prices are relevant- set at MC
• Achieve efficient use of airport at off peak
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Moderately Busy Peak
Price
K
DP
P‘s
Ps
P*p
Pr
Xo
X*o
Movements
Do
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Very Busy Regulated Airports
• Price regulation means that prices at peak and
off peak are too low to ration capacity- slots
must be used all the time
• Prices are irrelevant- slots do it all
• With non homogeneous movements, there
should be uniform prices
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Very Busy Airports
Price
K
DP
P
Do
Movements
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Pricing for busy and very busy airports
• What are the long run problems?
• Price regulation and slot allocation stops prices from market
clearing levels.
• Price mechanism does not trigger off a long term equilibrium.
However, an unregulated monopolist might under invest to reduce
output to Cournot monopoly prices and lumpiness of investment
might not be solved by contracts.
• Does regulation set incentives for optimal investments?
Prof. Dr. Hans-Martin
Niemeier
20
Theory of Optimal Pricing of Airports
III.Summary & further research
• Principles of marginal cost pricing are not followed
• Some evidence that prices are not optimal
• Welfare loss might be relevant.
Focus of research
• What is the level of charges in Europe? Has it changed?
• What is the structure of charges in Europe? Has it
changed?
• What are the pro and cons of subsidies?
• What is the level and structure of environmental charges?
Prof. Dr. Hans-Martin
Niemeier
21
Ramsey Pricing
Market 1
Market 2
P
P
p1a
p2a
π1
MC
DWL2
π2
DWL1
Q1a
MC
Q1S
Q2a Q2S
Prof. Dr. Hans-Martin
Niemeier
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