Congestion pricing and capacity for internationally interlinked airports

Abstract

This study investigates congestion pricing and capacity investment for an international network linking two countries’ airports and airlines. Under a Bertrand-Nash supposition for airports and Cournot competition for airlines in a duopoly, we characterize the locally optimal pricing rules for uniform and discriminatory charges levied by each country's airport. We clarify that the locally optimal pricing rules include a significant component resulting from the incentive to exploit the foreign airline, which is not included in the optimal pricing rules set by a social/global welfare-maximizing authority. We evaluate the pricing rules of the two airport charges for a round trip (i.e., the sum of each airport's per-departing-passenger charge). We clarify that the incentive to exploit the foreign airline is, theoretically, the only source of deviation from global welfare maximization (which may reach the first-best outcome) regardless of the uniform or discriminatory charges’ pricing regimes. Furthermore, we show that each airport's runway capacity investment could be globally efficient under globally optimal pricing rules, whereas each airport tends to overinvest under locally optimal pricing rules.