Competition for Scarce Inputs: The Case of Airport Takeoff and Landing Slots

The process of deregulating airlines in the United States began in earnest with the passage of the Airline Deregulation Act of 1978. The Act set in place a timetable for removing government controls on fares and entry into routes. However, airline access to airports has not been fully deregulated. In 1968, the Federal Aviation Administration (FAA) adopted the socalled "high-density rule" to combat congestion at four airports. Specifically, limits were placed on the number of operations per hour at Kennedy, La Guardia, O'Hare, and Washington National. More and more airports are becoming crowded, given the difficulties in securing permission from local authorities to expand existing facilities or to build new ones, so this problem will persist. For many years, the right to take off and land at the four crowded airports was determined by a committee system. Multilateral negotiations took place among the incumbent carriers and prospective entrants, with the FAA stepping in if an impasse occurred. Since 1986, incumbents have had property rights called "takeoff and landing slots" or simply "slots." A slot permits the owner to make one operation (a takeoff or landing) during a specified time period. Carriers now have the right to buy and sell slots." Questions remain about the optimal way to allocate existing or new slots. The first question asks why the incumbents should be given valuable property rights. The second asks whether allowing carriers to buy and sell slots will lead to monopolization of airports, with resulting higher fares. Repossessing slots and then selling them back to carriers would raise revenue and would ensure that those carriers willing to pay the most would acquire the slots. This has positive welfare implications in a perfectly competitive environment, but the impact is less clear if there is the potential for wielding market power. This Economic Review analyzes competition for scarce inputs such as airport takeoff and landing slots. It describes the outcome of an auction of slots between two carriers, who may