Airport slots, secondary trading, and congestion pricing at an airport with a dominant network airline

This study investigates the efficiency of airport capacity allocation at a stylized, partly congested airport with a dominant hub carrier and a local airline that both enjoy market power. While the local airline provides direct travel utility only, the hub carrier provides additional, indirect travel utility from network density benefits. As the density benefits increase along with market concentration, they formally capture the dilemma of hub concentration. In equilibrium, the hub carrier is dominant but its network remains inefficiently small. Thus, the three common allocation instruments yield ambiguous welfare results: Airport slots only restore efficiency when a use obligation enforces slot utilization, secondary slot trading leads to market preemption by the hub carrier while the network undersize persists, and congestion pricing increases the known welfare caveat from market power; removing the network undersize requires a subsidy with a service obligation. In contrast with previous studies, which mostly consider flights as homogenous goods and airlines as symmetric, the results at hand illustrate that vertical product differentiation based on network density benefits may increase the allocation inefficiencies that arise from imperfect competition. This insight may be crucial for airport capacity allocation at a concentrated network hub with a dominant carrier.