The impact of airport competition on technical efficiency: A Stochastic Frontier Analysis applied to Italian airports

Malighetti, Paolo and Martini, Gianmaria and Scotti, Davide and Volta, Nicola (2010): The impact of airport competition on technical efficiency: A Stochastic Frontier Analysis applied to Italian airports.

Abstract

We investigate how the intensity of competition among airports affects their technical efficiency by computing airports’ markets on the basis of a potential demand approach. We find that the intensity of competition has a negative impact on airports’ efficiency in Italy during the 2005–2008 period. This implies that airports belonging to a local air transportation system where competition is strong exploit their inputs less intensively than do airports with local monopoly power. Furthermore, we find that public airports are more efficient than private and mixed ones. Since public airports take into account the positive externalities created by air transportation in the local economy, they are more willing to subsidize airlines in developing the airports’ connections. Hence, policy makers should provide incentives to implement airports’ specialization in local systems where competition is strong. Moreover, when regulating airport charges, they should take into account the impact of the above externalities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Airport efficiency; stochastic distance function; airport competition
• Subjects: L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L93 - Air Transportation; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L5 - Regulation and Industrial Policy > L59 - Other

References

Aigner, D.J., Lovell, C.A.K., Schmidt, P., 1977, Formulation and Estimation of Stochastic Frontier Production Function Models. Journal of Econometrics, 6, 1, 21–37.

Barros, C.P., 2008, Technical Efficiency of UK Airports. Journal of Air Transport Management, 14, 175–178.

Battese, G.E., Coelli, T.J., 1992, Frontier Production Functions, Technical Efficiency and Panel Data: with Application to Paddy Farmers in India. The Journal of Productivity Analysis, 3, 153–169.

Battese, G.E., Coelli, T.J., 1995, A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data. Empirical Economics, 20, 325–332.

Boitani A., Cambini, C., 2007, La Difficile Liberalizzazione dei Cieli: Turbolenze Sulla Rotta, in Cambini, C., Giannaccari A., Pammolli, F. (eds.), Le Politiche di Liberalizzazione e Concorrenza in Italia. Bologna, Il Mulino, 197-232.

Charnes, A., Cooper, W.W., Golany, B., Seiford, L., Stutz, S., 1985, Foundations of Data Envelopment Analysis for Pareto–Koopmans Efficient Empirical Production Function. Journal of Econometrics, 30, 91–107.

Chow, C.K.W., Fung, M.K.Y., 2009, Efficiencies and Scope Economies of Chinese Airports in Moving Passengers and Cargo. Journal of Air Transport Management, 15, 324-329.

Coelli, T., 1996, A guide to FRONTIER Version 4.1: A Computer Program for Stochastic Frontier Production and Cost Function Estimation. (Centre for Efficiency and Productivity Analysis. University of New England).

Coelli, T., Perelman, S., 1999, A Comparison of Parametric and Non-Parametric Distance Functions: with Application to European Railways. European Journal of Operational Research, 117, 326–339.

Coelli, T., Perelman, S., 2000, Technical Efficiency of European Railways: A Distance Function Approach. Applied Economics, 32, 1967–1976.

Curi, C., Gitto, S., Mancuso, P., 2009, The Italian Airport Industry in Transition: A Performance Analysis. Journal of Air Transport Management, 16, 218–221.

EU, 2004, Commission Decision Concerning Advantages Granted by the Walloon Region and Brussels South Charleroi Airport to the airline Ryanair, case C516.

Fare, R., Grosskopf, S., Lovell, C. A. K., 1994, Production Frontiers, Cambridge, Cambridge University Press.

Fuellhart, K., 2003, Inter-metropolitan Airport Substitution by Consumers in an Asymmetrical Airfare Environment: Harrisburg, Philadelphia and Baltimore. Journal of Transport Geography, 11, 285-296.

Gillen, D., Lall A., 1997, Developing Measures of Airports Productivity and Performance: An Application of Data Envelopment Analysis. Transportation Research Part E, 33, 261–75.

Gosling, G., 2003, Regional Airport Demand Model: A Literature Review, (Southern California Association Of Governments, June).

Kumbhakar, S.C., Ghosh, S., McGuckin, J.T., 1991, A Generalized Production Frontier Approach for Estimating Determinants of Inefficiency in U.S. Dairy Farms. Journal of Business and Economic Statistics, 9, 279–286.

Kumbhakar, S.C., Lovell, C.A.K., 2000, Stochastic Frontier Analysis, Cambridge, U.K., Cambridge University Press.

Lovell, C.A.K., Richardson, S., Travers, P., Wood, L.L., 1994, Resources and Functionings: A New View of Inequality in Australia, in Eichhorn, W. (ed.), Model and Measurement of Welfare and Inequality, Berlin, Springer–Verlag, 787–807.

Lozano, S., Gutierrez, E., 2009, Efficiency Analysis and Target Setting of Spanish Airports. Networks and Spatial Economics.

Malighetti, P., Martini, G., Paleari, S., Redondi, R., 2007, An Empirical Investigation on the Efficiency, Capacity and Ownership of Italian Airports. Rivista di Politica Economica, 47, 157–188.

McClellan, M.B., Kessler, D.P., 2000, Is Hospital Competition Socially Wasteful? The Quarterly Journal of Economics, 115, 577–615.

Meeusen, W., van den Broeck, J., 1977, Efficiency Estimation for Cobb Douglas Production Functions with Composed Error. International Economic Review, 18, 435-444.

Oum, T.H., Yan, J., Yu, C., 2008, Ownership Forms Matter for Airport Efficiency: A Stochastic Frontier Investigation of Worldwide Airports. Journal of Urban Economics, 64, 422–435.

Pels, E., Nijkamp, P., Rietveld, P., 2001, Relative Efficiency of European Airports. Transport Policy, 8, 183–192.

Pels, E., Nijkamp, P., Rietveld, P., 2003, Inefficiencies and Scale Economies of European Airport Operation. Transportation Research Part E, 39, 341–61.

Propper, C., Burgess, S., Green, K., 2004, Does Competition between Hospitals Improve the Quality of Care?: Hospital Death Rates and the NHS Internal Market. Journal of Public Economics, 88, 1247-1272.

Propper, C., Burgess, S., Gossage, D., 2008, Competition and Quality: Evidence from the NHS Internal Market 1991 - 1996. The Economic Journal, 118, 138–170.

Reifschneider, D.,Stevenson, R., 1991, Systematic Departures from the Frontier: A Framework for the Analysis of Firm Inefficiency. International Economic Review, 32, 715–723.

Shephard, R.W., 1970, Theory of Cost and Production Functions, Princeton, NJ, Princeton University Press.

Simar, L., Wilson, P.W., 2007, Estimation and Inference in Two–Stage, Semiparametric Models of Productive Efficiency. Journal of Econometrics, 136, 31-64.

Tovar, B., Martin Cejas, R.R., 2009, Technical Efficiency and Productivity Changes in Spanish Airports: A Parametric Distance Functions Approach. Transportation Research Part E: Logistics and Transportation Review, 46, 249–260.