Hub congestion pricing: Discriminatory passenger charges

This paper investigates airport determination of per-flight and per-passenger charges in a hub-spoke network. The hub airport is congestible and it levies a per-flight charge on its carriers and discriminatory per-passenger charges on the local and connecting passengers. Our main results are: (i) the socially optimal per-passenger charges should take the higher congestion contribution by connecting passengers into account, leading to a higher charge on a connecting passenger than on a local passenger; (ii) generally, the social optimum cannot be achieved when the hub only levies a per-flight charge on carriers; (iii) the optimal per-connecting passenger charge should be lower (higher, respectively) than the per-local passenger charge when the per-flight charge is large (small, respectively); and (iv) a profit-maximizing hub can impose lower per-connecting passenger charges as compared to per-local passenger charges, owing to its market power, and this possibility is further strengthened by economies of traffic density.