The Impact of Air Route Subsidies on Airport Economy Based on Chengdu’s “Two Airports in a City” Mode

Abstract

The construction of second airport will help Chengdu to transform from a "domestic transportation hub" to an "international regional transportation hub", hence to leading the development of airport economy, and it is important to study the development strategy of airport economy under Chengdu's "two airports in one city" mode. This paper considers the price competition of two homogeneous air routes under the "two airports in one city" mode. Based on the Bertrand model, the competitive relationship of homogeneous air routes is constructed. Under Nash equilibrium, the optimized competition decisions of the two homogeneous air routes are solved. Hence, studies the influence of government behavior on the development of airport economy based on air routes competition. The results shows that the ticket price is positively correlated with the original demand of the two airports and negatively correlated with government subsidies. The development of airport economy is positively correlated with the government subsidies. However, when the development of airport economy is lower than a certain level, the air routes’ subsidies will decline government’s tax income, in this case, the government's optimal decision is not to subsidize.