Rival Airport Ancillary and City-Center Supplies

Abstract

Passengers can buy souvenirs, food and beverages or rent a car at the airport or in the city-center. This paper develops a basic model with unit demands for airport ancillary and city-center demands (passengers may park their one car and not many) to derive equilibrium pricing strategies of profit-maximizing airports and city-center companies and evaluates them from the social viewpoint. Passengers are myopic in the sense that only ticket prices matter for flight decisions or foresighted in the sense that non-aeronautical airport and city-center supplies matter for flight decisions, too. We find that the welfare evaluation of equilibrium airport pricing behavior can be independent of whether passengers are myopic or foresighted. Model extensions are analyzed to check the robustness of this independence result. They cover downward sloping individual demands for ancillary and city-center demands, the economic regulation of aeronautical prices, preferences for ancillary over city-center supplies, and airline market power.