Optimal Airport Charges and Capacity Expansion: Effect of Concession Revenues

Abstract: This paper is concerned with the price decision of an unregulated profit-maximizing airport with profitable concession activities. We show that a privatized airport will levy a lower airport charge if it has profitable concession operations than if the airport does not have concession operations. As a special case, the pricing policy may even attain social optimum. In general, however, the profit-maximizing price deviates from social optimum provided that the demand is growing over time and the per-flight concession profit is independent of the total number of flights. We further show that, without concession operations, a privatized airport tends to add capacity too late from a social point of view. However, when the airport has profitable concession operations, its timing of capacity expansion will be earlier and thus might be closer to social optimum