Platform Pricing and Consumer Foresight: The Case of Airports

35 Pages Posted: 27 Mar 2015

See all articles by Ricardo Flores-Fillol

Ricardo Flores-Fillol

Universitat Rovira i Virgili (URV)

Alberto Iozzi

Universita degli Studi di Roma

Tommaso M. Valletti

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 6, 2014

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.

Keywords: two-sided markets, platform pricing, one-way demand complementarity, consumer foresight.

JEL Classification: L1, L2, L93

Suggested Citation

Flores-Fillol, Ricardo and Iozzi, Alberto and Valletti, Tommaso M., Platform Pricing and Consumer Foresight: The Case of Airports (October 6, 2014). CEIS Working Paper No. 335. Available at SSRN: https://ssrn.com/abstract=2585098 or http://dx.doi.org/10.2139/ssrn.2585098

Ricardo Flores-Fillol

Universitat Rovira i Virgili (URV) ( email )

Dept. d'Economia (office 310), FCEE
Avinguda de la Universitat 1
Reus, Tarragona 43204
Spain
+34 977 75 98 51 (Phone)
+34 977 75 98 10 (Fax)

HOME PAGE: http://gandalf.fcee.urv.es/professors/RicardoFlores

Alberto Iozzi (Contact Author)

Universita degli Studi di Roma ( email )

Via Columbia n.2
Rome, rome 00100
Italy
39 06 7259 5923 (Phone)
39 06 204 02 19 (Fax)

Tommaso M. Valletti

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
142
Abstract Views
916
rank
205,792
PlumX Metrics