Intercontinental Airport Competition

Abstract

This paper analyzes strategic interaction between intercontinental airports, each of which levies airport charges paid by airlines and chooses its own capacity under conditions of congestion. Congestion from intercontinental flights is common across the airports since departure and arrival airports are linked one to one, while purely domestic traffic also uses each airport. The paper focuses on five questions. First, if both continents can strategically set separate airport charges for domestic and intercontinental flights, how will the outcome differ from the first-best solution? Second, how is the impact of strategic airport behavior affected by the extent of market power of the airlines serving the intercontinental market? Third, what happens if one continent has several competing intercontinental airports, each with its own regulator, while the other has a single airport and regulator? Fourth, how effective is a non-discrimination clause for airport charges, which prevents independent strategic use of the intercontinental charge? Fifth, what is the effect of higher airport operating costs on one continent (a result of security or immigration procedures) on the strategic outcome? The questions are addressed with an algebraic model and results are illustrated numerically.