Competition and Regulation in Network Industries

This paper offers an overview of what we know about the impacts of the economic regulation of commercial airports. It offers no new empirical findings, but rather considers the challenges of conducting ex post analysis of regulatory reform. It provides an overview of what completed studies have found and assesses whether regulations have achieved their objectives. Little is said about the desirability of these objectives. The focus is on the infrastructure needed to provide commercial passenger air services. Part of the discussion concerns the extent to which the results found in more recent studies offer replication of earlier findings. One function of applied analysis is to offer confirmation or refutation of the findings of prior studies, but this is often given short shrift compared to “novelty.” The paper focuses, in particular, on matters concerning ownership, slot allocation, and supplementary incomes.

Over the past years, airport regulation has been generating a lot of interest in Europe, and despite the passing of Airport Charges Directive in 2009, there is ongoing debate on the need for introducing tighter airport regulations. The aim of the paper is twofold. First, acknowledging that regulation is usually applied in markets where competition is weak or absent, we evaluate the ex-ante need for price regulation in the air transport industry. By focusing on the Italian airport industry, our analysis provides evidence of a high level of competitive pressure faced by airports (both inside and outside the industry), suggesting that tighter price regulation may not be the optimal solution. Second, assuming that stricter regulation of the airport industry is necessary, we empirically investigate the applicability of yardstick regulation to the Italian airport system, outlining critical challenges and issues that may arise when applying benchmarking techniques in setting the optimum level of efficiency at regulated airports. According to current literature, applicability of empirical benchmarking techniques requires some basic research requirements to be met, such as high-quality data, a homogeneous production function, and a sufficient number of comparable observations. We find that both heterogeneity and the relatively small number of comparable airports, along with the complexity of gathering proper data, may compromise the applicability of a regulation scheme based on yardstick principles at the national level.

In this study, we describe the results of a questionnaire distributed among European airports in the autumn of 2019. The questionnaire was designed to elicit airports’ views on the practicalities of competition between airports. We received 49 responses from airports in 24 countries; the respondents represent airports of different sizes. The survey results evidence behaviours consistent with significant competition between airports. Airports are taking active steps through their resourcing and staffing, incentives and marketing to attract airline services, and clearly see themselves taking the initiative in doing so. No airport, no matter how large, appears to be able to escape competition. The main policy message of our study, consistent with other recent reviews of airport competition, is that European regulators should re-evaluate their approach to the economic regulation of airports, especially as far as regional airports are concerned.

I present a graphical framework based on Subrahmanyam and Thomadakis (1980) that allows to study the impact from firm and market characteristics on systematic risk associated with the return on capital, i.e. Beta risk, for utilities under price control. Within this framework, Beta risk is driven by the magnitude of profit fluctuations following demand shocks. The framework is then applied to airport firm characteristics and airport market environment features. I find that the frequency of price control resets, the level of operating leverage, the extent of capacity constraints, and the degree of market power all have an unambiguous effect on the level of Beta risk. The scope of the regulatory perimeter and the type of traffic mix may also affect Beta risk; however, the magnitude and direction of their impact rely on the specifics of the case. The article may assist policy makers to formulate economically sound recommendations on how the regulatory rate of return for airport operators should be determined. Specifically, my findings suggest criteria that can be used to choose adequate peer companies of comparable systematic risk.