“Global pollution in air transportation markets when carriers have market power” (joint with Naoshi Doi and Xavier Fageda)
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Abstract: This paper studies the interaction between market power and global pollution in European air transportation markets. Using route-level panel data covering nearly 230,000 airline-route-year-quarter observations, we document that market power is substantial and has strengthened in recent years, particularly on concentrated, tourist, and hub routes. We then develop a theoretical duopoly model in which airlines choose airfares, flight frequencies, and emissions, showing that the optimal corrective policy for externalities depends critically on the strength of market power: a tax is needed when market power is weak, but a subsidy is needed when market power is strong, since airlines already restrict frequency below the efficient level. A structural demand-and-supply model estimated on the full European route network confirms this prediction empirically: the welfare-maximizing emissions tax is negative for most routes, implying that market-power distortions dominate climate-related externalities and that uniform, emissions-only aviation taxation is unlikely to be welfare-maximizing.
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