Ming Hsin Lin

Airport Privatization in International Inter-Hub and Spoke Networks

This paper investigates strategic interactions in airport privatization by two countries. Each country has a (gateway) hub and a local airport. In each country, a hub carrier operates hub–local and international hub–hub flights, whereas a regional carrier operates hub–local flights and forms an alliance with the foreign hub carrier. Previous studies considered a limited network with a (hub) airport per country and showed that privatizing the hub is generally the dominant strategy. By contrast, in our more general network, privatizing the hub (alone or along with the local airport) could be one of the equilibria only if the international hub–hub market is sufficiently large. If the hub–hub market is relatively large, governments have an incentive to privatize both their hub and local airports to a single operator on the condition that the operator is allowed to cross subsidize. We further find that governments may be trapped in a Prisoners׳ Dilemma.

The Way of Offering Vertically Differentiated Airline Services

This paper investigates should an airline offer vertically differentiated services, which are substitutes of its own services. The airline operates a certain number of direct flights to offer various types of services including nonstop, one-stop, or multiple-stop services. Homogenous passengers care about the fare and the flight(s) schedule when using a service. Under this general setting, we show that it is optimal for the airline to offer only one type of service in any particular city-pair market. This result supports a number of previous works that primarily argue network efficiency under the condition that only one type of service is offered in a particular market. This result also provides a theoretical explanation for the empirical finding that airlines that offer one-stop service through a hub are less likely to enter that same market with nonstop service than those that do not. This paper also presents an example of that if passengers horizontally differentiate among the type of services by other factors, the airline may offer multiple types of substitutive services in a market on its network.

Multi-Market Competition, R&D, and Welfare in Oligopoly

We investigate a multi-market Cournot model with strategic process research and development (R&D) investments wherein a multi-market firm meets new competitors that enter one of the markets. We show that entry can enhance the total R&D expenditures of the multi-market firm. Moreover, the incumbents profit nonmonotonically changes as the number of entrants increases. Depending on the fixed entry costs and R&D technologies, both insufficient and excess entry can appear. Our results imply that diversification of their products can be a useful strategy for firms.

A general-equilibrium analysis of airport pricing, capacity, and regulation

Using a general-equilibrium model that includes consumers, airlines, and an airport with both aeronautical services and non-aeronautical services, this study investigates the airports decisions on its aeronautical charge and capacity, as well as the size of its non-aeronautical services. In contrast to the existing literature, we formally model an airports non-aeronautical services by taking into account the endogenous determination of the size of the airports non-aeronautical services. First, we characterize the results for welfare maximization, and find that the self-financing property does not hold. Apart from carriers’ market power as a source of the failure for the self-financing property, we identify the presence of non-aeronautical services as a new source. Further, we show that the common practice of cross-subsidizing from the non-aeronautical to aeronautical services is incompatible with welfare maximization because welfare maximization requires exact self-financing within the non-aeronautical sector. Second, we derive the results for profit maximization by a monopolistic airport, and demonstrate that the imposition of two taxes, one on the airports aeronautical services and the other on its capacity investment, can recover the welfare-maximization results. Third, we analyze the two types of regulation, single till and dual till, which are often used in practice, and show that dual-till regulation yields higher welfare than single-till regulation, as long as the profit from non-aeronautical services is positive. This result is in contrast to the prevailing wisdom in the literature, which in general favors single-till regulation.

Airline Alliances with Low Cost Carriers

A major carrier operates one hub linking multiple non-hub cities. It forms an alliance with a low cost carrier whose nonstop service competes with its one-stop service. The alliance’s joint profit is maximized by withdrawing the competing one-stop (nonstop) service when the major carrier’s operating cost and connecting passengers’ hub-through additional time costs are large (small). The realized alliance is welfare-improving (welfare-decreasing) when these costs are large or small (intermediate). These findings suggest the necessity of alliance regulation. In some regions, the necessity of regulation does not monotonically change as the network size increases.

Optimal Privatization Policy under Private Leadership in Mixed Oligopolies

We discuss optimal privatization policies in mixed oligopolies in which a public firm is the Stackelberg follower (private leadership). We find that under constant marginal cost, the optimal degree of privatization is zero. When the marginal cost is increasing, however, the optimal degree is never zero, and full privatization can be optimal. These results suggest that the optimal privatization policy depends on the cost conditions. We also find that the optimal degree of privatization is substantially lower under private leadership than in the simultaneous-move model when there is no cost difference between public and private firms.

Optimal Privatization and Subsidy Policies: A Synthesis of the Privatization Neutrality Theorem

The privatization neutrality theorem states that the share of public ownership in an enterprise does not affect welfare (i.e., any degree of privatization is optimal) under optimal tax-subsidy policy. We revisit this neutrality result. First, we investigate the case in which the private enterprise is domestic. We show that this neutrality result holds only when public and private enterprises have the same cost function, and the optimal degree of privatization is zero regardless whether the public or private firm has a cost advantage. Next, we investigate a case in which the private enterprise is owned by both domestic and foreign investors. We show that the optimal degree of privatization is never zero, and thus, the neutrality result does not hold even when there is no cost difference between public and private enterprises.

Airline Pricing and Airport Charges in Hub-Spoke Networks with Congestion

This article investigates airline pricing and airport congestion charges in hub-spoke networks. When a public hub airport and two public spoke (local) airports independently levy their charges, airlines will eventually set a ticket price that overcharges the passengers for congestion delay cost and overcompensates for airline markups. Privatizing only local airports will always lead to more overcharge, whereas privatizing only the hub airport or all airports could result in lesser overcharge if the network markets are competitive. The degree of overcharge under a private hub and public local airports is always lesser than that under a public hub and private local airports, implying that privatizing a hub airport could yield higher social welfare than privatizing a local airport. Furthermore, investigation on compensation for airline markups also finds that privatizing a hub airport is preferable to privatizing a local airport. These findings have policy implications for airport privatization.