The I mpact of Within-Side - PowerPoint Presentation

Slide1

The Impact of Within-Side Competition in Two-Sided Business Models

M. Mahdi Tavalaei (University of Surrey, UK)Juan Santalo (IE Business School, Spain)Annabelle Gawer (University of Surrey, UK)

2017 Platform Symposium, BostonSlide2

BuyersGamersUsersConsumersReadersShoppers

SellersGame publishersApp developersMerchantsAdvertisersRetailerse-Commerce portalsVideo game consolesOperating SystemsPayment CardsYellow PagesShopping MallsTwo-Sided Platforms

2

Two-sided platforms

creates value

by

connecting two distinct

groups (

sides

) that are subject to cross-side network effectsSlide3
Indirect Network Effects Lead to Cross-Subsidization Strategy

3The utility of agents on one side depends on the number of agents on other sides;(Positive) indirect network effect = Cross-side network externalities

(Armstrong, 2006; Rochet & Tirole 2003, 2006)Divide-and-conquer pricing strategyIncentivize (subsidize) one side & Extract extra utility from other side (monetize)

Internalizing the externalities between the two sides

(

Belleflamme

&

Peitz

, 2010;

Caillaud

&

Jullien

, 2003; Rochet & Tirole, 2003, 2006)Slide4
Research Question

QUESTION: Do platform business models affect firm performance, when responding to a change in the competitive environment?This is a hard problem to study empirically: As generally, firms that operate platform vs

non-platform business models often belong to different industries and have fundamentally different characteristics, which make them NOT-COMPARABLEWHAT WE DO:We find an industry where firms with platform business models co-exist with non-platformsWe take advantage of a quasi-experiment: A change in regulation (exogenous shock) which affects both typesWe study the impact of

a change in competitive environment (

increasing

competition within one

side)

on:

Similar firm’s (in the same market) performance and response

(p

ricing

strategy),

The only difference between firms

: whether they had adopted a

two-sided business model or not.

4Slide5
Empirical Context

5

Buy ticket

Use aeronautical services

Rent commercial space

Focal firms = airports

Commercial

retailers care more

about the presence of airlines than vice versa

.

Both groups are subject to

competition/congestion

effects.

(Armstrong, 2007; Gillen, 2011)

Some airports adopt a platform business model, while others do not

Airport Industry

Buy commercial productsSlide6
Airports: Commercial side Revenue and Airside Revenue

6Airports revenue from retail = Max (% royalty of retail sales; minimum Annual Guarantee)Slide7

Platform vs. Non-Platform AirportsTwo pricing approaches for setting price for airlines

7“Residual”

“Compensatory”

“Airside Operating Expenses”

=

Airport

expenses due to airline use and operation of airport facilities

A

A

“Commercial Side Revenue” =

Airport

net revenue coming from

Commercial Side

B

B

“Airside Price” =

Price that airports charge airlinesfunction(A

-B)

function(A)

“Residual” = Platform Business Model

“Compensatory” = Non-Platform Business Model

Some airports adopt “Residual pricing”:

Airports

have a unique profit and loss account. There is

cross subsidization.(Signatory

) Airlines are subsidized by revenue from retailers

THIS MAKES THEM “PLATORM AIRPORTS”

Other airports adopt “Compensatory pricing”:

Airports

have two separate profit and loss

accounts. There

is no cross subsidization.

Two separate profit

functions to be

maximized.

(e.g.,

Doganis

, 2005; Forsyth, 2004

)

THIS MAKES THEM “NON-PLATORM AIRPORTS”Slide8
Empirical Context

8Only in platform airports (“Residual”) :Airlines are subsidized by the retailer side

Commercial retailers are the monetized sideAirports

Use aeronautical services

Rent commercial space

Buy commercial products

subsidized

Buy tickets

monetizedSlide9
Airline Subsidization: Anecdotal Evidence

“If the nonairline revenues are high in a given year, the landing fee for the airlines may be quite low. In recent years, several airports—including Los Angeles and Honolulu International—have approached a “negative” landing fee."  (Airport System Development; Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-STI-231, August 1984)"At the busiest residual airports, airline fees can be exceptionally low. In 1999, for example, Honolulu charged no landing fee because the residual covered all airfield costs!” (de 

Neufville & Odoni, 2003)9Slide10
Exogenous Shock: AIR-21, a

Regulation that Increases Competition within AirsideWendell H. Ford Aviation Investment and Reform Act for the Twenty -First Century

(AIR-21)Enacted in year 2001Mandated covered airports to diminish entry barriers for new airlines and foster within-airport competition among airlines.

Coverage

criteria:

account

for more than 0.25 percent of enplanements at U.S. primary airports (

large & medium hubs

)

are

highly

concentrated by a few airlines (controlling more than 50 percent of

traffic by two airlines)

Snider & Williams (2014) report that

AIR-21 significantly decreased airline fares on routes linked to the covered airport.

10Slide11

What the paper does11

Price charged to commercial retailers(COMMERCIAL SIDE)

Increase of intragroup competition among airlines

(due to AIR-21)

Airport financial performance

For platform vs. non-platform airportsSlide12
How AIR-21 could affect Demand from Airside, and Effect on Commercial side

12AIR-21

Entry to AirsideWill passengers spend more, or less, in retail?

Revenue from Commercial Side

Depends on:

number of passengers

composition of passengersSlide13
How AIR-21 could have affected Demand from Airside and Effect on Commercial side

13AIR-21

Entry to AirsideWill passengers spend more, or less, in retail?

Diminished Revenue from Commercial Side

Within-Side Airline competition

Increases rivalry among incumbent airlines

Could lead to incumbent legacy airlines closing routes or defecting to other airports, and substitutive entry from Low-Cost airlines

Depends on:

number of passengers

composition of passengers

Low-cost passengers spend less on retail

Decreases

Airport PerformanceSlide14

Entry to AirsideHow platform airports avoided this scenario

14AIR-21

Non-Low-Cost passengers spend more in retail

Airports increase price in Commercial Side

Airport subsidizes signatory legacy (non-Low-Cost) airlines

Cross-Subsidization

Diminished Price

in Airside for Signatory Airlines

Encourages incumbent legacy airlines to remain, and encourages new legacy airlines to sign in, while Low-Cost airlines exit

Increases

Airport Performance

Within-Side Airline Competition

Increases rivalry among incumbent airlines

Could lead to incumbent legacy airlines defecting to other airports, or closing routes, and substitutive entry from Low-Cost airlinesSlide15
Hypotheses

15H2. Higher intragroup competition in the airside increases the price for retailers on the commercial side, if they have a platform business model.

H1. When intragroup competition increases in the airside, only airports with a platform business model can increase their financial performance.Slide16
Data, Method and Variables

66 U.S. airports (all medium and large hubs) for years 1996-2005 Diff-in-Diff model applying AIR-21 regulatory shock at 200143 covered(treated) vs. 23 non-covered(control) airports

(Snider & Williams, 2014) DVsPerformance: Operating income per passenger AND Operating ROS (from FAA)Commercial side price: Airport’s Commercial (in-terminal) revenue per passenger (from FAA)Airside price: Airport’s Landing revenue per passenger (from FAA)IVs

AIR-21

intervention:

covered/non-covered airports , pre/post regulation dummies

(Treat ×

P

ost)

Airports

’ business

model:

residual vs. compensatory pricing approach (from ACI-NA)

CVs

N

umber of airport owners that serve the same city market (from DOT)

LCC penetration (from DOT)

Average Ticket price (from DOT)H

ub status (from FAA)

Metropolitan income per capita (from BSA)16Slide17
Data Overview (platform vs. non-platform airports)

17Slide18
Effect of AIR-21 on Airport Performance (Diff-in-Diff): H1

18

H1H1Slide19
Effect of

Air-21 on Airport Prices (Diff-in-Diff): H219

H2Slide20

Evidence for number of low-cost airlines goes up in non-platform airports20Slide21
Evidence for percentage of non-low-cost passengers goes

up in platform airports21

Passengers flying with low-cost airlines spend less in terminals (Castillo-Manzano, 2010).Slide22
Additional Robustness Tests

Regression Discontinuity Design (to deal with the concern about homogeneity of treated vs. control groups)Placebo analysis (to be sure about the exogeneity of the shock)Alternative Measure for Price in Commercial Side (real percentage of the sale that retailers pay to the airport as commercial price, from a subsample of contracts between airport and retailers)

Testing for possibility of manipulation for being in control or treated groupsTesting the potential cofounding effect of Sept. 11th 2001 terroristic attackMore in progress!22Slide23

Conclusion23

Price charged to commercial retailers goes up

Increase of intragroup competition among airlines

(due to AIR-21)

Airport

financial performance

goes up

Only for platform airportsSlide24
Specificity of the empirical context

24The results crucially depend on the heterogeneity within the airline sideNot all members of this side are equally valuable to the members of the other sideThe platform offers two types of contracts (affiliation) to the airline side membersSelf-selection from less-valuable side members (here, the low-cost airlines) who opt out of platform-airport signatory agreements

This introduces boundary conditions to our conclusionsBut this can be found in many platforms, so it highlights a useful mechanismIt is also a contribution, as it highlights the importance of types of members within one side Slide25
Contributions

First study (to our knowledge) that investigates differences in response/outcome to competitive change in the environment for platform vs. non-platform business models, in the same industry.Among first empirical studies

that study airports from two-sided market perspectivewhich is called for more studies (Gillen, 2011).Highlights the importance of heterogeneity within one side (i.e., how a portion of one side members are valued differently by the other side members) on the effect on the platform performance

25Slide26
Thank You!

26Slide27
Platform vs. non-Platform Airports before AIR-21 Shock

27Slide28
U.S. Airports & Profit S

eeking BehaviorDespite public governance in most of the U.S., their services and financing, they extensively collaborate with the private sector for cost efficiency and service quality objectives. In fact, the government body that owns a U.S. airport often employs only about ten to twenty percentage of the workforce active at the airport.Since U.S. carriers face a very competitive market, they act as a force to push airports toward efficiency and profitability

goals.Many airports in the United States, have in recent years begun to be organized as quasi-privatized airport authorities “[T]his has been driven by the FAA’s need for airports to be self-sustaining”. “[A]lthough social welfare is their fundamental objective, they recognize all other objectives hinge on their ability to invest and grow” (Bailey, 2002; Carney and Mew, 2003; de Neufville,

1999)

It

is quite reasonable to assume that U.S. airports pursue profitability

(

Gillen and

Lall

, 1997,

Marris

, 1963)

28Slide29

Airport Financing SourcesFuhr & Beckers, 200929Slide30
Data Overview

30