Regulation in the air: price-and-frequency caps

In spite of deregulation on the air-transportation markets, many connections are still operated by a single operator on regional markets, in particular in Europe. Evidence thus calls for some regulation in this industry. There is, however, a great concern for the (possibly negative) consequences of price regulation on the quality of services. We argue that both aspects should be considered jointly and propose a mechanism for the decentralization of the optimal structure of services. The regulatory procedure is based on the sole book-keeping data and requires the regulator to use only an estimate of travellers' average value of time. (C) 2004 Elsevier Ltd. All rights reserved.