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Platform pricing and consumer foresight: the case of airports

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Title: Platform pricing and consumer foresight: the case of airports
Authors: Flores-Fillol, R
Iozzi, A
Valletti, T
Item Type: Journal Article
Abstract: We analyze the optimal behavior of a platform providing essential inputs to do- wnstream firms selling a primary and a second complementary good. Final demand is affected by consumer foresight, i.e., consumers may not anticipate the ex post sur- plus 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 ai- rports, 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 anticipa- tion 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.
Issue Date: 1-Oct-2018
Date of Acceptance: 27-Apr-2018
URI: http://hdl.handle.net/10044/1/59320
DOI: https://dx.doi.org/10.1111/jems.12253
ISSN: 1058-6407
Publisher: Wiley
Start Page: 705
End Page: 725
Journal / Book Title: Journal of Economics and Management Strategy
Volume: 27
Issue: 4
Copyright Statement: © 2018 Wiley Periodicals, Inc. This is the pre-peer reviewed version of the following article, which has been published in final form at https://onlinelibrary.wiley.com/doi/full/10.1111/jems.12253
Keywords: Social Sciences
Business & Economics
1402 Applied Economics
Publication Status: Published
Online Publication Date: 2018-05-21
Appears in Collections:Imperial College Business School