Ignoring Spillover Effects of Airport Regulation: Should Regulators Take Their Blinkers Off?

Theoretical standard models and regulatory actions often ignore that firms are competing with other firms in related markets. In these contexts, cross-price relationships should be taken into account. The usual instinct with multiproduct firms would be to use Ramsey prices to find optimal markups. However, this is only applicable in situations with independent demand functions. Literature mostly covers cases where the regulated firm is a natural monopoly and therefore faces a budget constraint. This paper aims to provide conditions under which optimal price caps are set whenever there are related markets and the regulated firm is not a natural monopoly. © 2013 LSE and the University of Bath