Working Paper: CEPR ID: DP10658
Authors: Marc Ivaldi; Senay Sokullu; Tuba Toru
Abstract: 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.
Keywords: airport industry; two-sided markets
JEL Codes: C32; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Airport pricing decisions (L11) | Passenger demand (R22) |
| Airport pricing decisions (L11) | Airline behavior (L93) |
| Airports do not internalize externalities (D62) | Suboptimal social welfare outcomes (D69) |
| Privatization (L33) | Social welfare impacts vary by airport (L93) |