Multiproduct airport competition and e-commerce strategies

Valentina Bracaglia (), Tiziana D'Alfonso () and Alberto Nastasi ()
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Valentina Bracaglia: Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"
Tiziana D'Alfonso: Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"
Alberto Nastasi: Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"

No 2014-04, DIAG Technical Reports from Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"

Abstract: We study airport competition when vertically differentiated products may be strategically offered at the time of ticket purchase through the Internet: a base product – the flight – and a composite one – the flight plus some premium commercials (PCs), as car parking, car rental or hotel reservation. We model a two stages game: first airports decide whether to offer PCs online, thus making the purchasing decisions interact through observability of aviation and commercial prices. Then, they engage in Bertrand competition deciding on both prices. We find that airports set lower aviation charge than they would have levied absent concessions, when they are both competing on online offers. Nevertheless, when only one airport pursues the online offer, that facility sets a higher aviation charge than it would have levied absent concessions, as long as profits from retail earned at the facility on the travel day are not high enough. This suggests that the combined effect between airports competition on side business and demand complementarity does moderate airports market power in the core business. The Nash equilibrium of the game is such that both airports offer PCs on line, making travelers account for the surplus they would gain from both the sides of the business when they buy air tickets. This is welfare enhancing. Nevertheless, when profits from retail earned at the airports on the travel day are sufficiently high, the facilities are caught in a Prisoner’s Dilemma.

Keywords: Airports competition; e-commerce; concessions; vertical differentiation (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-com, nep-ict, nep-ind, nep-mkt and nep-tre
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