Yardstick Regulation in a Competitive Context? The Case of the Italian Airports

Abstract

Over the past years, airport regulation has been generating a lot of interest in Europe, and despite the passing of Airport Charges Directive in 2009, there is ongoing debate on the need for introducing tighter airport regulations. The aim of the paper is twofold. First, acknowledging that regulation is usually applied in markets where competition is weak or absent, we evaluate the ex-ante need for price regulation in the air transport industry. By focusing on the Italian airport industry, our analysis provides evidence of a high level of competitive pressure faced by airports (both inside and outside the industry), suggesting that tighter price regulation may not be the optimal solution. Second, assuming that stricter regulation of the airport industry is necessary, we empirically investigate the applicability of yardstick regulation to the Italian airport system, outlining critical challenges and issues that may arise when applying benchmarking techniques in setting the optimum level of efficiency at regulated airports. According to current literature, applicability of empirical benchmarking techniques requires some basic research requirements to be met, such as high-quality data, a homogeneous production function, and a sufficient number of comparable observations. We find that both heterogeneity and the relatively small number of comparable airports, along with the complexity of gathering proper data, may compromise the applicability of a regulation scheme based on yardstick principles at the national level.