Cross-Subsidization as a Mechanism to Discipline Market Power: An Airport Pricing Model

The article examines cross-subsidization in airports as an incentive to refrain from the exercise of market power and avoid setting excessive airport charges. The study is relevant as the traditional treatment of airports as natural monopolies presumes that an airport operator has incentives to increase airport charges, meanwhile commercialization and growing importance of non-aeronautical services provide incentives to reduce charges for aeronautical services and not to exploit market power. The study develops a stylized airport profit-maximization model using a vertical-structural approach that distinguishes rent and platform pricing logics and derives threshold conditions under which aeronautical services are cross-subsidized by revenues from non-aeronautical services. The results show that the optimal level of an airport charge decreases as non-aeronautical revenue per passenger increases. The paper also systematizes the factors determining the profitability of non-aeronautical services. In addition, the article adds to the debate widely represented in the airport economics literature on whether the disciplining effect of commercialization is sufficient to argue against ex ante economic regulation. The article also provides the practical application of the model in a counterfactual setting: using financial statements for 5 Russian airports, the study assesses threshold values under which a platform business model is economically justified. The paper concludes that a divergence between private and social optima is not sufficient justification per se for introducing ex ante economic regulation.