Airport congestion pricing and cost recovery with side business

This paper explores the implications of an imperfectly competitive non-aeronautical market for cost recovery at a congestible airport. We show that aeronautical revenue under welfare maximization is short of its costs, because the optimal airport charge must be set lower than the first-best level, to counteract market power in the non-aeronautical market, which results in insufficient revenue. However, imperfectly competitive non-aeronautical service (“side business”) leads to a positive profit that the airport may share, thereby improving the chance to recover costs. We demonstrate that airport overall cost recovery, including the profit from side business, may be satisfied, depending on the profit from side business and the demand elasticity of side business. Our analysis further identifies the role of “another good,” which can be a substitute or a complement for non-aeronautical service, in cost recovery. We analyze both cases of exogenous and endogenous prices of another good. When the price of another good is exogenous, the price higher (lower) than the marginal cost in the another-good market makes cost recovery less (more) likely. When the price of another good is endogenous, cost recovery is more likely (unlikely) to hold when non-aeronautical service and another good are closer complements (substitutes) or/and the airport absorbs more (less) profits from side business. The possibility that a monopoly airport fails to satisfy cost recovery is also examined.