Pricing regime choices for international airports: A rationale for the non-discrimination principle

Abstract

This study investigates whether airports should be prohibited from charging differential charges to airlines, as the 1944 Chicago Convention and the EU directive intend. We consider an international network in which two countries’ airports are interlinked and served by each country’s carrier. Using a linear demand structure reflecting differentiated airline services and congestion delay costs, our global welfare maximization approach first verifies that the closed-form global welfare level achieved under optimal discriminatory charges is larger than (or equal to) that under optimal uniform charges when carriers are asymmetric (or symmetric). This verification shows the superiority of discriminatory charges for a single airport authority. We then construct a standard non-cooperative game in which each country chooses from uniform or carrier-specific discriminatory charges to maximize local welfare. We surprisingly find that, while discriminatory charges can levy home and foreign carriers differently, each country choosing uniform charges is a unique Nash equilibrium. The unique Nash equilibrium exists not only for asymmetric airline competition but also for any degree of airport congestion and product differentiation of airline services. This finding provides the economic rationale for the prevalent non-discriminatory principles for international airports.