Input Allocation and Downstream Market Structure: Slot Control in the U.S. Airline Industry

Résumé

Scarcity of inputs creates an entry barrier. An efficient allocation of scarce inputs may hinder competition by inadvertently rewarding downstream market power. In the airline industry, at congested airports the number of landing slots is fixed. This creates a trade-off between more competition in larger markets and more service to smaller communities. Theoretical results developed in the paper together with empirical evidence show that the significance of this trade-off may be less than previously thought. The paper suggests that the focus of policymakers should be directed at detecting misuse of scarce inputs rather than at finding alternatives to auctions.