Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/19305
Title: Air transport security user charge pricing : an investigation of flat per-passenger charge vs. Ad Valorem user charge schemes
Authors: Oum, TH
Fu, X
Issue Date: 2007
Publisher: Pergamon Press
Source: Transportation research. Part E, Logistics and transportation review, 2007, v. 43, no. 3, p. 283-293 How to cite?
Journal: Transportation research. Part E, Logistics and transportation review 
Abstract: Following the 9/11 terrorist incidence, most countries introduced security charges on air travel, mostly in the form of flat rate per passenger. However, it is clear that such flat rate per passenger may not be socially optimal as implied by previous studies on airport pricing including those utilizing Ramsey pricing. Thus, an alternative pricing scheme may enhance social welfare. In this paper, recognizing the competitive reality of today's airline markets we formulate and solve numerically a differentiated duopoly model in order to compare welfare implications of adopting the two most convenient forms of aviation security pricing: (1) charging a flat rate per passenger; and (2) charging Ad Valorem user fees. Since obtaining meaningful analytical results requires unrealistically restrictive assumptions, we designed a numerical experiment and conducted over 5000 simulations using a wide range of possible values of firms' conduct parameters, extent of product differentiation, and market share split between full service airline (FSA) and low cost carrier (LCC). Our results show that Ad Valorem user fee is superior to the current policy of charging flat rate security fee in all cases except for very few unrealistic cases. The same conclusion can be directly applied to all other per-passenger fees or taxes being collected by governments and/or airports. This is an important finding given that taxes and user charges now account for up to 30% of the total ticket prices of short distance domestic travel in US.
URI: http://hdl.handle.net/10397/19305
ISSN: 1366-5545
EISSN: 1878-5794
DOI: 10.1016/j.tre.2006.10.006
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