Air transport subsidies for resident passengers when carriers have market power

• We study subsidies on prices when carriers have market power.
• We consider ad-valorem and specific subsidies based on residential condition.
• It is the case of passengers living in European outermost regions.
• The optimal strategy critically depends on the proportion of resident passengers.
• The ranking between subsidies depends on the passengerś willingness to pay.

We consider passengers with different willingness to pay that may live in a given geographical area and, thus, be entitled to a subsidy. The carrier has market power and may increase the ticket price if a subsidy for resident passengers is introduced. First, we find that if the proportion of residents is high enough, non-resident passengers may be expelled from the market. Second, we show that specific (ad valorem) subsidies for resident passengers are better if the proportion of passengers with high willingness to pay is low (high) enough. Finally, we apply these results to the Canary Islands case.