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Air transport subsidies for resident passengers: The unexpected effects on competition

Author

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  • Socorro, M. Pilar
  • Betancor, Ofelia

Abstract

Subsidies for resident passengers aim to promote air connectivity in remote areas. The European Union allows these subsidies to passengers living in European outermost regions and other specific regions. This paper analyses the effects of this kind of subsidies on the ticket price and level of competition. If there is no competition in the market, the monopoly airline increases the ticket price to capture part of residents’ subsidy and, thus, non-residents will be worse off. However, when the regulator raises the amount of the subsidy, there may be an unexpected effect on competition: a potential entrant may find the entry profitable, spurring competition and air connectivity. With competition, the non-desirable effects of granting a subsidy only for residents are mitigated. However, this latter case is only possible if the proportion of resident passengers in the route is high enough.

Suggested Citation

  • Socorro, M. Pilar & Betancor, Ofelia, 2020. "Air transport subsidies for resident passengers: The unexpected effects on competition," Research in Transportation Economics, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:retrec:v:79:y:2020:i:c:s0739885919302847
    DOI: 10.1016/j.retrec.2019.100772
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    Cited by:

    1. Francesco Russo & Giuseppe Fortugno & Marco Merante & Domenica Savia Pellicanò & Maria Rosaria Trecozzi, 2021. "Updating National Air Passenger Demand from Traffic Counts: The Case of a Secondary Airport in an Underdeveloped Region," Sustainability, MDPI, vol. 13(15), pages 1-16, July.
    2. de Rus, Ginés & Socorro, M. Pilar, 2022. "Subsidies in air transport markets: The economic consequences of choosing the wrong mechanism," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 160(C).
    3. Jun Tu & Juan Du & Min Huang, 2023. "Competition between Green and Non-Green Travel Companies: The Role of Governmental Subsidies in Green Travel," Sustainability, MDPI, vol. 15(9), pages 1-33, May.

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    More about this item

    Keywords

    Subsidy; Residents; Non-residents; Ticket price; Competition;
    All these keywords.

    JEL classification:

    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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