Construction of the new airport terminal has gone over budget and the Airport Authority needs every...

Construction of the new airport terminal has gone over budget and the Airport Authority needs every dollar it can get to pay its debt. They have asked your advice on a pricing strategy for parking at the airport. They know there are three types of parking users: 1) Short term users, who come to the airport to drop off or pick up passengers and stay for two hours or less; 2) Business travelers, who are away for one to four days; and 3) Leisure travelers that need parking for a week or more. a) Illustrate and use an appropriate economic model to explain how the airport could maximize its parking revenue. b) Use your analysis to discuss whether building a new parking garage would be a good investment for the airport?

Expert Solution

Solution

(b) Yes building a new parking garage would be a good investment for the airport.The govt.can increase it's revenue in this manner due to increased capacity.

(a) As mentioned above,there are 3 types of parking users : Short-term,business and Leisure Travelers.

Firstly,the airport should analyze the number of users that fall into each category and accordingly,there can be different strategies to target different sections of travelers.

---> The airport authority should create different sections / provisions / location for different kinds of users

Economic Model

There are 2 ways in which the govt. can increase their revenue / revenue realizations by - (i) Increasing the prices (ii) Encouraging / Incentivizing the pre-booking

-->Since the short term users (duration is less but there is more of occurrence) use the facility only for shorter duration,the airport authorities without increasing the prices can propose that the users to purchase a prepaid card with a certain balance / certain monthly / quarterly pass so that the govt.can earn the revenue from them in upfront which better realization of revenue.

--->Business Users - The Govt. can increase the fare for these kind of users as their demand would be inelastic to price.It is the same methodology followed by the Airlines.They can given a choice for discount in case they pre-book the parking.

--->Leisure Booking - Here the govt.should give a priority to pre-booking rather than increasing the prices because the users are mostly the general public who should not be facing the heat resulting from increase in the prices.

Rahul Sunny answered 5 hours ago

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