A NOTE ON OPTIMAL AIRPORT PRICING IN A HUB-AND-SPOKE SYSTEM

This paper deals with the socially optimal pricing of airports in a hu b-and-spoke network, taking into account explicitly the fact that dema nds for airport services at hub airport and spoke airports are complem entary. It is shown that a welfare gain is to be made by switching fro m the regime of pricing each airport independently of other airports i n the network to the regime of pricing the hub and spoke airports join tly. Intuitively, given the demand complementarity, the optimal pricin g of a hub-and-spoke airport network as a system may require for the h ub airport to subsidize the money-losing spoke airports. Our result im plies that there may be a welfare loss due to the reduction in allocat ion efficiency if a network of airports currently being managed by a n ational government are to be defederalized (or privatized) separately for each airport as being carried out in Canada and in Australia. Sinc e one of the major reasons for defederalization (or privatization) of airports is to reduce x-inefficiency caused by the centralized, bureau cratic and inflexible management, the welfare loss due to the allocati ve inefficiency should be weighed against the one-time gain in x-effic iency expected from defederalization of those airports. This result ca lls for a caution on the current debate on airport devolution which fo cuses mainly on the expected one-time reduction in x-inefficiency in a irport operation and management and the need for flexible attitude tow ard local community needs, without even discussing its effects on redu ced allocative efficiency which will continue to occur in perpetuity.