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Competition in Congested Service Networks with Application to Air Traffic Control Provision in Europe

We analyze congested network-based markets and their impact on competition, equilibrium charges and efficiency. Several strategies are explored including price caps, mergers and investments in new technologies. We find that congested networks served by collaborating (serial) and competing (parallel) firms may lead to excessive prices. Additionally, oligopolists may only serve captive demand, leading to inefficiently low flows. Perhaps surprisingly, permitting a firm with market power to horizontally integrate with a competitor may improve efficiency. We also show that price caps in congested networks are ineffective due to their failure to signal the existence of scarce resources. Instead, partial vertical integration may prove beneficial by creating incentives to expand capacity through technology adoption, provided the price cap regime is dropped. The model is subsequently illustrated with a case study of air traffic control provision in Western Europe, in which it is shown that substantial changes in the regulation are required in order to create a more cost efficient sector with increased capacity. This paper was accepted by Serguei Netessine, operations management.