Wednesday, June 17, 2015

Platform pricing and consumer foresight: The case of airports

Ricardo Flores-Fillol (Universitat Rovira i Virgili) ; Alberto Iozzi (DEF and CEIS, Università di Roma "Tor Vergata"); Tommaso Valletti (Imperial College London, DEF and CEIS, Universita di Roma "Tor Vergata" & CEPR) explore Platform pricing and consumer foresight: The case of airports.

ABSTRACT:  Airports have become platforms that derive revenues from both aeronautical and commercial activities. The demand for these services is characterized by a one-way complementarity in that only air travelers can purchase retail goods at the airport terminals. We analyze a model of optimal airport behavior in which this one-way complementarity is subject to consumer foresight, i.e., consumers may not anticipate in full the ex post retail surplus when purchasing a flight ticket. An airport sets landing fees, and, in addition, also chooses the retail market structure by choosing the number of retail concessions to be awarded. We find that, with perfectly myopic consumers, the airport chooses to attract more passengers via low landing fees, and also sets the minimum possible number of retailers in order to increase the concessions’ revenues, from which it obtains the largest share of profits. However, even a very small amount of anticipation of the consumer surplus from retail activities changes significantly the airport’s choices: the optimal airport policy is dependent on the degree of differentiation in the retail market. When consumers instead have perfect foresight, the airport establishes a very competitive retail market, where consumers enjoy a large surplus. This attracts passengers and it is exploited by the airport by charging higher landing fees, which then constitute the largest share of its profits. Overall, airport’s profits are maximal when consumers have perfect foresight.

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