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This study delves into how platform business models affect firm performance in response to competitive changes, focusing on the airport industry. The research explores the impact of increased competition within one side on firm strategies and performance, comparing those with two-sided business models against non-platform businesses. Utilizing a quasi-experimental design based on a regulatory change, the study analyzes pricing strategies and performance in response to competitive dynamics. The empirical context of the airport industry provides insights into how platform vs. non-platform airport models influence revenue streams, pricing strategies, and overall financial performance.
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The Impact of Within-Side Competition in Two-Sided Business Models 2017 Platform Symposium, Boston M. MahdiTavalaei (University of Surrey, UK) Juan Santalo(IE Business School, Spain) Annabelle Gawer(University of Surrey, UK)
Two-Sided Platforms Sellers Game publishers App developers Merchants Advertisers Retailers e-Commerce portals Video game consoles Operating Systems Payment Cards Yellow Pages Shopping Malls Buyers Gamers Users Consumers Readers Shoppers Two-sided platforms creates value by connecting two distinct groups (sides) that are subject to cross-side network effects
Indirect Network Effects Lead to Cross-Subsidization Strategy • The 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 strategy • Incentivize (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)
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-COMPARABLE WHAT WE DO: • We find an industry where firms with platform business models co-exist with non-platforms • We take advantage of a quasi-experiment: A change in regulation (exogenous shock) which affects both types • We 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 (pricing strategy), • The only difference between firms: whether they had adopted a two-sided business model or not.
Empirical Context • Airport Industry • 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 Rent commercial space Use aeronautical services Buy ticket Buy commercial products
Airports: Commercial side Revenue and Airside Revenue • Airports revenue from retail = Max (% royalty of retail sales; minimum Annual Guarantee)
Platform vs. Non-Platform Airports • Two pricing approaches for setting price for airlines • 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” “Residual” = Platform Business Model “Compensatory” = Non-Platform Business Model
Empirical Context • Airports Rent commercial space Use aeronautical services • Only in platform airports (“Residual”) : • Airlines are subsidized by the retailer side • Commercial retailers are the monetized side subsidized Buy tickets monetized Buy commercial products
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)
Exogenous Shock: AIR-21, a RegulationthatIncreasesCompetitionwithinAirside • Wendell H. Ford Aviation Investment and Reform Act for the Twenty -First Century(AIR-21) • Enacted in year 2001 • Mandated covered airports to diminish entry barriers for new airlines and foster within-airport competition among airlines. • Coveragecriteria: • account for more than 0.25 percent of enplanements at U.S. primary airports (large & medium hubs) • are highlyconcentrated 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.
What the paper does Airport financial performance Increase of intragroup competition among airlines (due to AIR-21) Price charged to commercial retailers (COMMERCIAL SIDE) For platform vs. non-platform airports
How AIR-21 could affect Demand from Airside, and Effect on Commercial side Entry to Airside AIR-21 Revenue from Commercial Side Will passengers spend more, or less, in retail? • Depends on: • number of passengers • composition of passengers
How AIR-21 could have affected Demand from Airside and Effect on Commercial side • Depends on: • number of passengers • composition of passengers Entry to Airside AIR-21 Will passengers spend more, or less, in retail? Within-Side Airline competition Diminished Revenue from Commercial Side Increases rivalry among incumbent airlines Decreases Airport Performance Low-cost passengers spend less on retail Could lead to incumbent legacy airlines closing routes or defecting to other airports, and substitutive entry from Low-Cost airlines
How platform airports avoided this scenario Entry to Airside Non-Low-Cost passengers spend more in retail AIR-21 Within-Side Airline Competition Airport subsidizes signatory legacy (non-Low-Cost) airlines Increases rivalry among incumbent airlines Airports increase price in Commercial Side Increases Airport Performance Diminished Price in Airside for Signatory Airlines Could lead to incumbent legacy airlines defecting to other airports, or closing routes, and substitutive entry from Low-Cost airlines Cross-Subsidization Encourages incumbent legacy airlines to remain, and encourages new legacy airlines to sign in, while Low-Cost airlines exit
Hypotheses • H1. When intragroup competition increases in the airside, only airports with a platform business model can increase their financial performance. • H2. Higher intragroup competition in the airside increases the price for retailers on the commercial side, if they have a platform business model.
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 2001 • 43 covered(treated) vs. 23 non-covered(control) airports (Snider & Williams, 2014) • DVs • Performance: 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 × Post) • Airports’ business model: residual vs. compensatory pricing approach (from ACI-NA) • CVs • Number of airport owners that serve the same city market (from DOT) • LCC penetration (from DOT) • Average Ticket price (from DOT) • Hub status (from FAA) • Metropolitan income per capita (from BSA)
Effect of AIR-21 on Airport Performance (Diff-in-Diff): H1 H1 H1
Evidence for number of low-cost airlines goes up in non-platform airports
Evidence for percentage of non-low-cost passengers goes up in platformairports Passengers flying with low-cost airlines spend less in terminals (Castillo-Manzano, 2010).
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 groups • Testing the potential cofounding effect of Sept. 11th 2001 terroristic attack • More in progress!
Conclusion Airport financial performance goes up Increase of intragroup competition among airlines (due to AIR-21) Price charged to commercial retailers goes up Only for platform airports
Specificity of the empirical context • The results crucially depend on the heterogeneity within the airline side • Not all members of this side are equally valuable to the members of the other side • The platform offers two types of contracts (affiliation) to the airline side members • Self-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 conclusions • But this can be found in many platforms, so it highlights a useful mechanism • It is also a contribution, as it highlights the importance of types of members within one side
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 perspective • which 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
U.S. Airports & Profit Seeking Behavior • Despite 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]lthoughsocial 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)
Airport Financing Sources Fuhr & Beckers, 2009