Concession revenue and optimal airport pricing

In recent years airports have been under growing pressure to become financially self-sufficient and to pursue profit maximization in their non-aeronautical or concession operations. In this paper we examine the optimal pricing in a model where concession and aeronautical operations of an airport are considered together with an overall break-even constraint. We find that the optimum solution may require a subsidy from concession to aeronautical operations. However, such a cross-subsidy may or may not restore marginal-cost pricing on aeronautical operations. On the other hand, social welfare can be higher when an airport is allowed to make profits in concession operations than when marginal-cost pricing is imposed on concession operations. (C) 1997 Elsevier Science Ltd. All rights reserved.