Platform Pricing and Consumer Foresight: The Case of Airports

21 Pages Posted: 29 Oct 2018

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)

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Date Written: Winter 2018

Abstract

We analyze the optimal behavior of a platform providing essential inputs to downstream firms selling a primary and a second complementary good. Final demand is affected by consumer foresight, that is, consumers may not anticipate the ex post surplus from the secondary good when purchasing the primary good. We first set up a reduced‐form platform model and evaluate the effects of consumer foresight on the platform's optimal decisions. Then, we specialize the analysis in the context of airports, which derive revenues from both aeronautical and, increasingly, commercial activities. An airport sets landing fees and, in addition, it chooses the retail market structure by selecting 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. However, even a very small amount of anticipation of the consumer surplus from retail activities changes significantly the airport's choices: the optimal 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. 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, the airport's profits are maximal when consumers have perfect foresight.

Suggested Citation

Flores-Fillol, Ricardo and Iozzi, Alberto and Valletti, Tommaso M., Platform Pricing and Consumer Foresight: The Case of Airports (Winter 2018). Journal of Economics & Management Strategy, Vol. 27, Issue 4, pp. 705-725, 2018. Available at SSRN: https://ssrn.com/abstract=3273540 or http://dx.doi.org/10.1111/jems.12253

Ricardo Flores-Fillol (Contact Author)

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

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

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