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. Two countries’ (publicly owned) airports and airlines interlink, and passengers travel round-trips. Each country may choose pricing regimes (uniform versus discriminatory charges) and charge levels, sequentially or simultaneously, to maximize local welfare. Surprisingly, we find that each country choosing uniform charges achieves unique equilibrium in the sequential game, in which countries may commit to a particular pricing regime before setting charge levels. However, in the simultaneous game without the commitment effect, each country choosing discriminatory charges achieves the unique equilibrium. The total welfare achieved under the former equilibrium is larger than (equal to) that under the latter for asymmetric (symmetric) airline competition. These findings provide the economic rationale for the prevalent non-discriminatory principles for international airports from a local and global welfare perspective.