CONCESSION REVENUE AND OPTIMAL AIRPORT PRICING

In recent years airports have been under growing pressure to become fi nancially self-sufficient and to pursue profit maximization in their n on-aeronautical or concession operations. In this paper we examine the optimal pricing in a model where concession and aeronautical operatio ns of an airport are considered together with an overall break-even co nstraint. 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 operation s. On the other hand, social welfare can be higher when an airport is allowed to make profits in concession operations than when marginal-co st pricing is imposed on concession operations. (C) 1997 Elsevier Scie nce Ltd. All rights reserved.