Intercontinental-airport regulation

• Non cooperative regulators of departure and arrival airports generate too high airport charges.
• The airport taxes can be a more important market distortion than imperfect competition on intercontinental routes.
• It is in the interest of each continent to limit the number of regulators.
• Multiple regulators on one continent or a simple pricing rule limit the welfare loss of strategic airport regulation.
• Non-cooperative regulators of departure and arrival airports underestimate the full costs of air traffic regulations.

This paper analyzes strategic interaction between intercontinental airport regulators, each of which levies airport charges paid by airlines and chooses its airport capacity under conditions of congestion. Congestion from intercontinental flights is common across intercontinental airports since departure and arrival airports are linked one to one, while purely domestic traffic also uses each airport. The paper focuses on two questions. First, if both continents can strategically set separate airport charges for domestic and intercontinental flights, how will the outcome differ from the first-best solution? Second, how is strategic airport behavior affected by the extent of market power of the airlines serving the intercontinental market? We see that strategic airport pricing and capacity choices by regulators lead to a welfare loss: the regulators both behave as monopolists in the market for intercontinental flights, charging a mark-up and decreasing capacity. This welfare loss even overshadows possible negative effects from imperfect competition within the intercontinental airline market. We further discuss how the presence of multiple regulators on one continent or a simple pricing rule might constrain the welfare loss created by strategic airport regulation.