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Airports as two-sided platforms? A critical contribution Karsten Frhlich University of Applied Sciences Bremen 9 th Conference on Applied Infrastructure Research Technical University Berlin 9 th October 2010 1 Introduction (1)

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1

Airports as two-sided platforms?

A critical contribution

Karsten Fröhlich

University of Applied Sciences Bremen

9th Conference on Applied Infrastructure Research Technical University Berlin 9th October 2010

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Introduction

(1)

  • Increasing literature and applications “two-

sided markets” or “platforms”

  • Applied to airports

– Implications for regulation

  • Are airports “two-sided platforms” (TSP)?

– What are the implications for regulation

2

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Outline

  • Two-sided markets
  • Application to airports
  • Non-aviation revenues
  • Discussion and policy implications
  • Conclusion

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Outline

  • Two-sided markets
  • Application to airports
  • Non-aviation revenues
  • Discussion and policy implications
  • Conclusion

4

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“Two-sided markets”

(1)

  • Classic example: dating agency

– Two groups of consumers – Men and women – Both yield utility from using the platform – Utility also increases with number of users from the other group

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“Two-sided markets”

(2)

  • To function, platform must bring “both

parties on board”

  • Similar to network externalities

– telephones – Here: indirect usage externalities

  • Pricing of paramount importance

– Particularly if cross-usage externalities are unevenly distributed

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“Two-sided markets”

(3)

  • Further (cited) examples:

– Advertising platforms – eBay – Operating systems (Windows)

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“Two-sided markets”

(4)

  • Roche & Tirole (2003) define two-sidedness

in such a way that the volume of transactions (output) fluctuates if the price structure (relative prices between the two groups) changes whereas the price level (defined as the total revenues from both sides of the platform) remains unaffected. If that does not hold true the market is said to be one-sided.

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“Two-sided markets”

(5)

  • Evans and Schmalensee (2007) point out:

TSP arise where two parties face externalities; not be solved differently (or with lower transaction costs) than through the platform

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Outline

  • Two-sided markets
  • Application to airports
  • Non-aviation revenues
  • Discussion and policy implications
  • Conclusion

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Application to airports (1)

  • Are airports TSP?

– Platform for airlines and passengers – Passengers gain from destinations, …; airlines gain from greater “plateau” of passengers

  • Case made by Gillen (2009)

– Related (but not limited) to non-aviation revenues

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Application to airports (2)

  • Passenger pay no entry fee

– Bear a passenger fee indirectly

  • But: passengers do get sold something

– Airport does not “bring together”

  • No cross-usage externalities

– Tickets is pre-purchased (e.g. through website)

  • Airport is (essential) input for airlines

– Charges are levied accordingly

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Application to airports (3)

  • What if airports charges passengers directly

– E.g. for service of being “handled” through to the aircraft

  • Vertical relationship remains unaffected

– Products are (perfect) complements – Decision to buy ticket reflects willingness to “buy airport”

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Application to airports (4)

  • Therefore: vertical externalities

– No cross-usage externalities

  • Similar consequences regarding pricing

– Airport pricing influences airline pricing and passenger demand – Airline product decisions have impact on airport revenues

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Outline

  • Two-sided markets
  • Application to airports
  • Non-aviation revenues
  • Discussion and policy implications
  • Conclusion

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Non-Aviation revenues (1)

  • Airports also sell non-aviation products

– Food and beverages, clothing, …

  • Different products, hence no two-sided

market

  • Airlines seek passengers, not shopping

passengers

  • Passenger fly, shoppers shop

– Maybe different for revenue sharing

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Non-Aviation revenues (2)

  • Complementarity between aviation and

non-aviation

– Possibly largely through income effects – Car parking related to aviation product from consumer’s point of view

  • Starkie (2001) uses complementary

“revenue streams” instead of “demand complementarity”

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Non-Aviation revenues (3)

  • Price reductions in aviation product 

increase in demand for non-aviation products

– Reverse?

  • Complementarity has impact on pricing

– 

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Outline

  • Two-sided markets
  • Application to airports
  • Non-aviation revenues
  • Discussion and policy implications
  • Conclusion

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Discussion (1)

  • Vertical externalities and coordination

problems

– No cross-usage externalities

  • Complementary demands for aviation and

non-aviation products

  • Airports not TSP
  • But what are the effects of the above?

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Discussion (2)

  • Standard model for multi-product firm:

– Depending on cross-price elasticities and economies in production  optimal prices diverge from single product situation – One product boosts demand of another

  • If cross-price effects and scope economies

are large  Starkie (2001) argument

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Discussion (3)

  • Due to vertical relationship

– Double marginalization – Vertical externalities –  individual decisions (by airlines and/or airports) might not optimal from integrated point of view

  • Implications for policy:

– Regulation of aviation prices negatively impacts non-aviation prices

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Discussion (4)

– Price structure is important, airports might not

  • ptimize

– Airports’ negotiated contracts might impede downstream competition – Regulation should assess impact of non- aviation business

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Outline

  • Two-sided markets
  • Application to airports
  • Non-aviation revenues
  • Discussion and policy implications
  • Conclusion

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Conclusion (1)

  • Airports are not TSP
  • Better described by vertical relationship

– With multi-product profit function

  • Have similar (if not identical) effects as

two-sided concept

– Effect of airport’s charges feed through to passengers

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Conclusion (2)

  • Problems such as double marginalization

usually “irrelevant” in “normal” industries

– Here: possible impediments – Price regulation, implicit price structure regulation

  • With complementary demands

– Lower price for aviation product – But: depend on size and direction of complementary effects

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Conclusion (3)

  • Concept of two-sided markets does not

enrich airport regulation discussion

– Models to analyze airports are available – Effects of vertical relationship and complementary products resemble TSP effects

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Thank you very much!

Karsten Fröhlich

University of Applied Sciences Bremen Werderstraße 73 D – 28199 Bremen Tel.: 0421/5905-4283 Fax: 0421/5905-4815 Email: karsten.froehlich@hs-bremen.de