Revenue sharing with multiple airlines and airports

This paper investigates the effects of concession revenue sharing between an airport and its airlines. It is found that the degree of revenue sharing will be affected by how carriers' services are related (complements, independent, or substitutes). In particular, when carriers provide substitutable services, the sharing proportions might become negative if horizontal substitutability is sufficiently strong. In these situations, while revenue sharing improves profit, it reduces social welfare. It is further found that airport competition results in a higher degree of revenue sharing than would be had in the case of single airports. Nevertheless, the airport-airline chains may derive lower profits through this revenue-sharing rivalry, and the situation is similar to a classic Prisoners' Dilemma. As the airport-airline chains move further away from their joint profit maximum, social welfare rises beyond the level achievable by single airports. Our analysis also shows that the (equilibrium) revenue-sharing proportion at an airport decreases in the number of its carriers, and increases in the number of carriers at the competing airports. Finally, the effects of the pure sharing contract are compared with those of the two-part sharing contract.