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Airport Prices in a Two-Sided Market Setting: Major US Airports

Listed author(s):
  • Ivaldi, Marc
  • Sokullu, Senay
  • Toru, Tuba

This paper analyzes the rationale of airport business models. First, it provides evidence that the airports should be considered as two sided markets because of significant network externalities between the airlines and the passengers. This result invalidates the traditional approach where the airport-airline-passenger relationship is considered as vertically integrated, taking passengers as final consumers. Second, a testing procedure aimed at eliciting the real business model of airports demonstrates that the major U.S. airports do not internalize the externalities existing between airlines and passengers. We find that these airports set profit maximizing prices for the non-aeronautical services to passengers and Ramsey prices for the aeronautical services to airlines. Given these results, we conduct a welfare analysis by simulating the implementation of profit maximizing prices when an airport fully accounts for the two-sidedness of its activities. In particular, we show that the impact on social welfare is not independent on the specific features of each airport and that the privatization of airports cannot be considered as the only solution for airports.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 10658.

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Date of creation: Jun 2015
Handle: RePEc:cpr:ceprdp:10658
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References listed on IDEAS
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  1. Graham, Anne, 2009. "How important are commercial revenues to today's airports?," Journal of Air Transport Management, Elsevier, vol. 15(3), pages 106-111.
  2. Kaiser, Ulrich & Wright, Julian, 2006. "Price structure in two-sided markets: Evidence from the magazine industry," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 1-28, January.
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
  4. Gagnepain, Philippe & Marin, Pedro L, 2006. "Regulation and Incentives in European Aviation," Journal of Law and Economics, University of Chicago Press, vol. 49(1), pages 229-248, April.
  5. Jerome Foncel & Marc Ivaldi, 2005. "Operating System Prices In The Home Pc Market," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 265-297, 06.
  6. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, 09.
  7. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
  8. Volodymyr Bilotkach & Joseph Clougherty & Juergen Mueller & Anming Zhang, 2012. "Regulation, privatization, and airport charges: panel data evidence from European airports," Journal of Regulatory Economics, Springer, vol. 42(1), pages 73-94, August.
  9. Basso, Leonardo J. & Zhang, Anming, 2008. "On the relationship between airport pricing models," Transportation Research Part B: Methodological, Elsevier, vol. 42(9), pages 725-735, November.
  10. Severin Borenstein, 1989. "Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 344-365, Autumn.
  11. Gillen, David, 2011. "The evolution of airport ownership and governance," Journal of Air Transport Management, Elsevier, vol. 17(1), pages 3-13.
  12. Steven Berry & Panle Jia, 2010. "Tracing the Woes: An Empirical Analysis of the Airline Industry," American Economic Journal: Microeconomics, American Economic Association, vol. 2(3), pages 1-43, August.
  13. Filistrucchi, L. & Geradin, D.A.A.G. & van Damme, E.E.C., 2012. "Identifying Two-Sided Markets," Discussion Paper 2012-008, Tilburg University, Tilburg Law and Economic Center.
  14. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  15. Bilotkach, Volodymyr & Fageda, Xavier & Flores-Fillol, Ricardo, 2010. "Scheduled service versus personal transportation: The role of distance," Regional Science and Urban Economics, Elsevier, vol. 40(1), pages 60-72, January.
  16. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-1672, September.
  17. Fuerst, Franz & Gross, Sven & Klose, Ulf, 2011. "The sky is the limit? The determinants and constraints of European airports commercial revenues," Journal of Air Transport Management, Elsevier, vol. 17(5), pages 278-283.
  18. Kevin Currier, 2008. "Price Cap Regulation of Airports: A New Approach," Economics Bulletin, AccessEcon, vol. 12(8), pages 1-7.
  19. Elena Argentesi & Lapo Filistrucchi, 2007. "Estimating market power in a two-sided market: The case of newspapers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1247-1266.
  20. Berry, Steven T, 1990. "Airport Presence as Product Differentiation," American Economic Review, American Economic Association, vol. 80(2), pages 394-399, May.
  21. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
  22. Achim Czerny, 2006. "Price-cap Regulation of Airports: Single-till Versus Dual-till," Journal of Regulatory Economics, Springer, vol. 30(1), pages 85-97, 07.
  23. Richard, Oliver, 2003. "Flight frequency and mergers in airline markets," International Journal of Industrial Organization, Elsevier, vol. 21(6), pages 907-922, June.
  24. repec:ebl:ecbull:v:12:y:2008:i:8:p:1-7 is not listed on IDEAS
  25. Basso, Leonardo J., 2008. "Airport deregulation: Effects on pricing and capacity," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 1015-1031, July.
  26. Senay Sokullu, 2012. "Nonparametric Analysis of Two-Sided Markets," Bristol Economics Discussion Papers 12/628, Department of Economics, University of Bristol, UK.
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