Pricing policies for international airports: Per-flight versus per-passenger charges

Abstract

This study investigates the pricing regime choices between per-flight and/or per-passenger charges for international airports. Each country may choose (i) mix charges for per-flight and per-passenger charges, (ii) per-flight charges only, (iii) per-passenger charges only, and (iv) marginal-operating-cost pricing for each type of charge (Duo-MOC pricing). Each country’s airline competes on flight frequency and passenger volume in the next stage. The global welfare maximization shows that the global welfare levels rank as follows: mix charges (which leads to the first-best outcome), per-passenger charges only, and per-flight charges only (equivalent to Duo-MOC pricing). Regarding local welfare maximization, if both countries choose the same pricing regime in the first stage, then each country’s maximum local welfare achieved in the second airport stage is ranked as follows: Duo-MOC pricing, per-flight charges only, mix charges, and per-passenger charges only. If each country is allowed to choose different regimes, each chooses mix charges to achieve a unique equilibrium. A typical prisoner’s dilemma occurs. The local (and global) welfare rankings under local welfare maximization, combined with the unique equilibrium in the pricing regime choice game, provides clear and sharp policy implications for international airports.