Effects of Airport Concession Revenue Sharing on Airline Competition and Social Welfare

Abstract

This paper studies the competitive and welfare implications when an airport offers airlines the option of sharing its concession revenue. By studying a non-congested airport whose aeronautical charge is regulated, we find that revenue sharing allows the airport and airlines to internalise a positive demand externality between aeronautical services and concession services, which may improve welfare. However, revenue sharing may cause a negative effect on airline competition. An airport may strategically share the revenue with its dominant airlines, which can further strengthen these firms' market power. Such exclusive revenue sharing may or may not improve welfare. Implications for a general airport–airline vertical relationship are discussed.