Wednesday, November 26, 2008
Posted by D. Daniel Sokol
The day before Thanksgiving is typically the busiest travel day of the year. In honor of those of you traveling, you may enjoy reading the article Airport Congestion: When Theory Meets Reality by Michael Levine.
ABSTRACT: Some airports experience significant congestion at least some of the time, where "congestion" means that use of the airport by one aircraft delays or prevents use of the airport in that time slot by another. Another way to say this is that airport access can be "scarce." Virtually all economists agree that when a resource is scarce, it can be allocated most efficiently through the use of a mechanism that prices it to reflect its value to all other potential users. But efficient prices can only be assured in theory when both supply and demand are competitive, markets are complete (they allow purchases in any amount at any time), and the participants maximize utility by maximizing profit.
Analysts have used this theory to argue that airport congestion should be managed through the price mechanism, either by raising prices at peak times or by auctioning off permission to operate at peak times ("slots") to the highest bidder. Recently, the Federal Government has tried to put this theory into practice by instituting slot auctions at the major New York airports. But these airports are owned by a monopolist (as in most cities), the auction market proposal adopted by the FAA leaves markets incomplete by excluding many users and the airport monopolist, here as elsewhere, is a political entity whose goals often conflict with economic efficiency. In addition, the mechanism adopted by the FAA effects a large wealth transfer from airlines to the FAA, a result that may in principle not affect efficiency but which creates enormous resistance on the part of airlines to using the price mechanism and a substantial incentive to use the money for inefficient but politically expedient purposes.
This Essay takes account of these economic and political realities by proposing an auction market that reduces the influence of monopoly, is relatively complete, doesn't involve a wealth transfer, and still preserves choice at the margin that takes into account the value placed by other users on the slot. It establishes a blind auction in which slots are chosen at random and made available to all bidders (including the previous owner), with the proceeds going to the former owner and the amount of both the winning and second-highest bid (but not the identity of the second-highest bidder) made public. This forces the slot owner to explicitly consider the value it places on a slot and to compare it to an actual cash offer that has been revealed by the auction. The airport has no monetary incentive to create scarcity. Wealth transfers are voluntary.