Testing the Regulatory Model: The Expansion of Stansted Airport

This paper examines the application of price-cap regulation to the UK airport industry, with particular reference to the expansion of London-Stansted. This expansion is relevant to the debate concerning investment incentives inherent in the RPI–X approach and whether the UK style of regulation encourages the ‘sweating of assets’ at the expense of new investment. Stansted’s expansion also suggests a willingness of the authorities to accept the leveraging of market power in pursuit of perceived public-interest goals; it provides an insight into the behaviour of economic agents when capital market disciplines are mute; and it illustrates some unintended consequences that can follow from market intervention. JEL classification: L51, L93, L97, R48.