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A unit tax on CO2 emissions is introduced in year 11. In year 12, the unit tax increases (and is transformed into a reduction subsidy). Of course, this resulted in higher prices, but also in higher profits for the airlines, net of CO2 taxes: Firms can be better-off with a system that limits their incentives or ability to set up important production capacities (if they do not have to pay for it, cf windfall profits and the CO2 debate).

A unit tax on CO2 emissions is introduced in year 11. In year 12, the unit tax increases (and is transformed into a reduction subsidy). Of course, this resulted in higher prices, but also in higher profits for the airlines, net of CO2 taxes: Firms can be better-off with a system that limits their incentives or ability to set up important production capacities (if they do not have to pay for it, cf windfall profits and the CO2 debate).

Effet of a CO2 tax on price and CO2 emissions during the game at Ecole des Ponts - ParisTech.

Effet of a CO2 tax on price and CO2 emissions during the game at Ecole des Ponts - ParisTech.

Price Evolution during the game at Ecole des Ponts - ParisTech, and correlation between price and Herfindahl index.

Price Evolution during the game at Ecole des Ponts - ParisTech, and correlation between price and Herfindahl index.

Barrier To Entry I. During the game, two incumbent airlines set up barriers to entry on a route between congested airports by using the grand-father rule and "babysitting" airport slots (blue line on this graph -> multiplying flights on small aircraft to keep the maximum number of slots and prevent entry)

Barrier To Entry I. During the game, two incumbent airlines set up barriers to entry on a route between congested airports by using the grand-father rule and "babysitting" airport slots (blue line on this graph -> multiplying flights on small aircraft to keep the maximum number of slots and prevent entry)

Barrier To Entry II. This being done, the airlines eventually found themselves with many seats to sell on many small planes with much space between seats, and with most of the costs being sunk. This situation resulted in final ticket prices that were not higher than on other comparable markets with more entry, and consequently, in a higher social surplus (since frequencies and confort were much better). (by the way, there is no general message here!)

Barrier To Entry II. This being done, the airlines eventually found themselves with many seats to sell on many small planes with much space between seats, and with most of the costs being sunk. This situation resulted in final ticket prices that were not higher than on other comparable markets with more entry, and consequently, in a higher social surplus (since frequencies and confort were much better). (by the way, there is no general message here!)

Unexpected Demand Crisis: Short-run impact through prices (year 5), long-run adjustment through capacity (year 6). And exit from crisis (year 7)

Unexpected Demand Crisis: Short-run impact through prices (year 5), long-run adjustment through capacity (year 6). And exit from crisis (year 7)

As departure gets closer, demand is less and less elastic and more and more sensitive to flight frequencies. Demand also exhibits diminishing returns to frequencies.

As departure gets closer, demand is less and less elastic and more and more sensitive to flight frequencies. Demand also exhibits diminishing returns to frequencies.

Merger wave in year 9. On the affected markets, prices and industry profits increase (including profits of firms that did not take part in the merger. Especially them...)

Merger wave in year 9. On the affected markets, prices and industry profits increase (including profits of firms that did not take part in the merger. Especially them...)

link between quantity and price competition. Low production capacity entails less competition and higher price

link between quantity and price competition. Low production capacity entails less competition and higher price

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