Airport pricing strategy by hub airports: does the number of local airports matter?
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Airport pricing strategy by hub airports: does the number of local airports matter? Akio Kawasaki1 Received: 16 October 2019 / Accepted: 25 July 2020 / Published online: 5 August 2020 © The Japan Section of the Regional Science Association International 2020
Abstract This study investigates airport pricing policy (uniform or discriminatory pricing) for international and domestic flights. We assume a game in which two countries exist, where each country has a complementary international hub airport and several local airports. In the symmetric setting, we find that uniform pricing (discriminatory pricing) is a unique Nash equilibrium for a small (large) number of local airports and that for an intermediate number of local airports, equilibria emerge when a hub airport adopts uniform pricing (discriminatory pricing) and the other hub airport adopts discriminatory pricing (uniform pricing). Additionally, we show that uniform pricing is socially preferable for both countries. Keywords Airport fee competition · Third-degree price discrimination · Uniform pricing · Airline network JEL Classification L11 · L13 · L93
1 Introduction Two types of airport pricing strategies exist for international and domestic flights; one is uniform pricing and the other is discriminatory pricing. Under uniform pricing, the international hub airport (hereafter, “hub airport” for simplicity) charges the same airport fee for both domestic and international flights, whereas under discriminatory pricing, the hub airport charges a different airport fee. In Japan, Central Japan International Airport Co., Ltd adopts uniform pricing, whereas Narita International Airport and Kansai International Airport adopt discriminatory pricing. Elsewhere, some hub airports (e.g., TPE, BKK) adopt discriminatory pricing and others (e.g., HKG, KUL) adopt uniform pricing.
* Akio Kawasaki a‑kawasaki@oita‑u.ac.jp 1
Faculty of Economics, Oita University, 700, Dannoharu, Oita, Japan
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836
Asia-Pacific Journal of Regional Science (2020) 4:835–857
Discriminatory pricing is an example of third-degree price discrimination, which many studies discuss in terms of its impact on social welfare and firms’ profit (see the Sect. 1.1 for more details). However, the findings of previous studies cannot be applied to examine the airport pricing of domestic and international flights for the following reasons. First, studies have not introduced dependence between markets. In airport markets, even when the hub airport discriminates its fee between domestic and international flights, these two airport fees depend on each other when passengers use both the domestic local airport and the international hub airport. Second, the type of competition is different than that in previous studies. In the airport market, hub airports compete with each other to set a high airport fee. Although each hub airport has an incentive to set a high airport fee, if both hub airports (i.e., the airport for departure and airport for arrival) set a high airport fee, carriers decrea
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