Abstract
This paper investigates airport privatization by two countries. Each country has a (gateway) hub airport a local airport. In each country, a hub carrier operates hub-local and international hub-hub flights, and a regional carrier also operates hub-local flights and forms and alliance with the hub carrier from the other country. In equilibrium governments symmetrically privatize both their hub and local airports to a single operator when the hub-hub market size is relatively large with respect to the hub-local market size; otherwise they keep all airports under public ownership. In the former case, governments may be trapped in a Prisoners’ Dilemma as both would be better off by privatizing their local airports only or by keeping them all under public ownership. We further examine privatization decisions when governments are committed to pursue privatization. The resulting equilibrium is that both countries privatize their hub and local airports when the hub-hub market size is relatively large; otherwise, they privatize their hub airports. Similarly, a Prisoners’ Dilemma situation emerges as they both could be better off by privatizing their local airports only.
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