Abstract
This paper investigates strategic interactions in airport privatization by two countries. Each country has a (gateway) hub and a local airport. In each country, a hub carrier operates hub–local and international hub–hub flights, whereas a regional carrier operates hub–local flights and forms an alliance with the foreign hub carrier. Previous studies considered a limited network with a (hub) airport per country and showed that privatizing the hub is generally the dominant strategy. By contrast, in our more general network, privatizing the hub (alone or along with the local airport) could be one of the equilibria only if the international hub–hub market is sufficiently large. If the hub–hub market is relatively large, governments have an incentive to privatize both their hub and local airports to a single operator on the condition that the operator is allowed to cross subsidize. We further find that governments may be trapped in a Prisoners׳ Dilemma.
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