Grounded Beefs: Monopoly Prices, Minority Business, and the Price of Hamburgers at U. S. Airports Author(s): Laura I.

Langbein and Len Wilson Reviewed work(s): Source: Public Administration Review, Vol. 54, No. 3 (May - Jun., 1994), pp. 259-264 Published by: Blackwell Publishing on behalf of the American Society for Public Administration Stable URL: http://www.jstor.org/stable/976729 . Accessed: 29/03/2012 17:43
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GroandedBeef: Monopoly
Minority
Hamburgers

Pices,
Price

Busines,
at U.S.

and

he
Airports

of

The Laura I.LangbeinAmerican University Len The Wilson, American University

at cost Whydoproducts purchased airports morethanthose soldnearby?Whyshouldreaders thisjournal care? This of exists the pricedisparity despite facts thattheAirport to Administration (AA)is supposed prohibitit and that sellers thesame competition amongmultiple of product(at shouldbringprices down. LauraI Langlarger airports) beinand Len Wilson examine institutional the of design to airport administration explainthispuzzle. In thisorganizationalinvestigation, supported evidence by froma surveyofairportconcessions, authors the determine both that theAAand suppliers an incentive maintaina nonhave to competitive game,evenwhenthere multiple are suppliers. In thisgame,substitutes distant,demandis inelastic, are and keepingprices abovecompetitive levelsraises profits for theconcession revenues theAA. and for

and of to the in Recently, anattempt improve quality appearanceairport have bothconcessionaires airport and officials foodandmerchandise, the effort (Weinstein made concentrated to change waytheydobusiness a away fromselling 1991). Theyareshying 1991;Finney, andMadrigal, the items stale and Theyarechanging typeof hotdogs. tourist hackneyed brand nameproducts.Welland they merchandise carry areoffering selections.It is not standard is airport knownmerchandise replacing and to (Pizza opportunities Hut, dining snacking unusual findfamiliar and fashion merchandisand and cookies) popular Nathan's, Mrs.Field's With and Books). Bloomingdales, Benjamin (Walt ingselections Disney, available manyshopping at the that merchandise resembles selection will to the malls, beliefis thatmorepassengers be morewilling spend products.Despite moneyon familiar theirtimein airports spending is morethanone the thesechanges, priceof the merchandise usually surin mall wouldpayforthesameproduct a shopping or in the area a at the rounding airport.Forexample, hotdog Baltimore-Washington between $1.50 and$1.69, but at ranges (BWI)airport International it at the outside airport, is $.99.A hamburgerBWIcosts $1.89; Hardees it is the at outside airport, Wendy's, is $.89. Coffee $1.09at National and 7-11. $.89 Airport, $1.09atDulles, atBWI, $.72ata neighborhood are At theBWIPizza pan Hut,allsingle pizzas $2.99;ata neighborhood or or Pizza Hut,thesamethingis $1.99forplain, $2.29forpepperoni of of 1 the from Table shows results a survey theprices several sausage. in DC airports theWashington, itemssoldby three foodandnonfood of items bya local sold with and drugarea, compared theprices thesame some items store convenience Although individual soldatairand store. in cost itemsoldelsewhere, every thetotal case, ports lessthanthesame of items atanairport more thesame marketmarketbasket sold costs than convenience ordrug store store. basket at purchaseda nearby items sold These between and airport goods thesame disparities price for conin nearby are First, neighborhoods puzzling tworeasons. airport are to for cessionaires contractually goods services and required selltheir the surrounding airport.The airport with prices competitive the area to by administration is supposed keeptrack theprices compariof (AA) if is required to sonshopping; theprices too high,theconcessionaire are Many airports airports. is within lower them. Second, there competition clothes or selling more havemorethanone newsstand, thanone place costs of that places eat. Assuming thereal to and toysorgifts, numerous in business an airport no higher are thanthe costsof doingthe doing same sellers of business say,a shopping thepresence numerous mall, in, monopoly byexploitrents should from collecting any prevent oneseller at captive location anairport. somewhat ingtheconsumers' that forces should rules administrative andcompetitive Yet,despite levels, at food andmerchandise competitive keepthe priceof airport we oftenremain thanoutside airport.In thisarticle, the higher prices leaves how administration neidesign airport of explain theinstitutional thertheairport with nor administrator theconcessionaires theincentive to setprices prices.However, The is competitively. result monopoly-like wealsopresent effects evidence thedistributional of supra-competithat tiveprices enterprises business that comprise transfer helpsminority a
this well-offflyingpublic. Nevertheless, at the expenseof the relatively socialloss and is transfer not only hidden,it also exactsa deadweight is inequitable. vertically horizontally and

Public Administration * May/June Vol. No.3 Review 1994, 54,

259

of EnvironmentAirports TheEconomic

are the Forpublicadministrators, implications thatinstitutional sions. Bothusers ultimate- Table 1 The frompolicyconsequences. hidden ly provide designcannotbe divorced travel assoand of Marketbaskets specifically ciatedservices the con- Comparable patrons airport that and inefficiencies inequities confront to Items Sold at Washington,DC magni- sumingpublic. The AA of whilenot necessarily earthshaking in andtaxpayers general, arrangementcollects revenues from AreaAirportsand Local administrative result an unfortunate of tude,area direct Stores from gets authority someof its revenues thoseit both classes of users to Drug/Convenience in whicha regulatory and finance its capital and that the Overall, articleillustrates simpleeconomics regulates. Average Price($) the publicchoicecanbe usedto anticipate likelypolicyanddistribu- operatingexpenses. No Pair1 (12 items) 17.67 National Airport design. of tionaloutcomes institutional matterwhetherto avoid Peoples 14.52 Drugstore deficits, grow,or to col- Pair2 (13 items) to lect discretionary income, National 16.72 Airport seeksto the AA probably 15.65 7-11
maximize its revenues.

by are in Mostairports the UnitedStates operated a governmental The AA has a limited Pair3 (11 items) 16.51 Dulles Airport quasi-governmenstate,or othernonfederal a body,either municipal, 13.79 Drugstore capacity to generate Peoples referred as the airportadministration) increased to tal authority(hereafter revenues directly Pair4 (12 items) to fromthe airlines.On one Dulles all and provided (Mason,1984). Technically, services products 15.57 Airport by are at passengers the airport delivered tenantswho haveleases hand, to the extent that 7-11 14.86 tenwith or administrationa sublease a prime directly theairport with routes, Pair5 (9 items) airlines monopolize BWIAirport 13.99 industry. services the aviation to ancillary provide ant. Mosttenants and airports computerized Peoples 9.89 Drugstore ground transportation car parking, rentals, include Theseconcessions reservationservices,the Pair6 (10 items) and and newspapers magazines, services, cargo,food, beverages, air demandfor airline trips BWIAirport 12.80 only food, merchandise items. In this study,we consider general will be priceinelastic. In 7-11 10.38 concessions. merchandise and newsstands, general that case, airlines are Source:Washingtonian March Magazine, for of nearly unlikelyto resist paying 1992,p. 16. is a large source revenue airports, Concession activity to the to 1981,p. 213). According data increased (Gesell, airport fees,and equal thatfrom airlines in year1989, theAAhasan incentive State Administration,fiscal fromthe Maryland Aviation to in The earned the $23,173,144in raisethe landing it charges airlines. increase landing Airport International fees Baltimore/Washington in is and activity. demand price airline but operations, $20,252,207 concession on feeswillbe passed to consumers, if consumer for in will the inelastic, fareincreases result morerevenues theAA. If, who Passengers well-wishers cometo greetthemarean enticand in and is demand elastic, if an increase captive on the otherhand,consumer Not for ing market an entrepreneur. onlyaretheya relatively will fare on fees of public. landing is passed to consumers, increases resultin of a largeportion the consuming market, theyconsist but for and for less passengers, demand concessions, lowerrevenues boardan aircraft every yearand fewer Morethan450 millionpassengers is capacity fixed,the AA is the AA. Also,to the extentthatairport an at departing aircraft another thenturninto450 millionpassengers the by new to in and the limited its ability generate revenues increasing numairport. This, combinedwith the meetersand greeters and ber of flights. Thus, air traveldemandelasticity the limited two a that of makes market consists nearly of employees the airport, morerevof the reduce ability theAAto generate of customers billionpotential (Gesell,1992, p. 215). In 1990, there capacity airports airlines. fees the by for enues itself raising landing it charges who Chicagothrough millionpassengers passed wereoversixty-six DirectoInternational Membership alone(Airport O'Hare Operators' addifor it By contrast, is muchmoreeffective theAA to collect annual tionalrevenues had airports an average ry). In 1989, thosewho frequented con1984). Historically, (Mason, fromconcessions 1992,p. 215). TheU. S. aver- cessions granted income $65,182(Gesell, of household bid a through competitive process.TheAAcan are of was income $37,403in 1990(U.S.Bureau theCen- contract agehousehold who with a primeconcessionaire, maythen havesublease sus,1992,p. 447). concessionaire that services theprime specific to arrangementsprovide the require typically arrangements provide.Thesublease concessions itselfcannot and spenda lot of moneyat airport Passengers others to revenues of to subcontractor paya percentage the subcontractor's and to for (1991), while waiting flights.According Weinstein Madrigal with each directly The the primecontractor. AA can alsocontract 38 buy 64 percent passengers foodandbeverage of items, percent buy contractsthe For stores. concessionaire. example, AAmayhavetwoprime goodsin the retail purchase newsstand items,and 13 percent merand one forfoodandbeverages, the otherfornewsandgeneral for expenditures theseitemsare$10.90, $3.48, and$16.49 Average could contractors thenhaveone or Either bothof theprime chandise. with to also and Meeters greeters contribute themarket 45 respectively. they service do notwishto provide. for subcontracts a specific with 24 items food buying andbeverage ($17.39), percent news- ormore percent retail items ($4.44). stand buying ($10.1 purchases 1),and10percent for by bidsaresolicited a Request In either case,the competitive The its (RFP)in whichthe AA details requirements. RFP Proposal of in the of will definethe number locations, placement the airport requirements, investment capital the eachlocation, sizeof the space, to andthetypeof goodsandservices be delivof administration.thehours operation, to is This marketplace alsoattractive the airport are that a include stipulation prices not to ered.TheRFPwillusually it or Eventhoughthe AA is a government agency publicauthority, area, itemsin thesurrounding and of prices similar exceed average the substanfrom Although doesnot get all of its revenues a legislature. that revenues thewinof percentage gross it willalsosetthe required tial revenuesdo come from federalgrantsand trust funds,these funds 1990). must ningconcession payto theAA (Chandler,

Structure TheInstitutional

must generallybe spent in specificways. The remainingrevenuesare its in unconstrained how it fashions RFP. TheAA is not entirely and come from fees paid by those who use the airport discretionary funds(virtually entitlement federal grant-in-aid that directly. There are two classesof users: the airlinesand the conces- Airports receive 260 Review May/June Vol. No.3 * Administration Public 1994, 54,

For havingauthority prices toregulate AAs, the

isnot samehavingincentive prices. the as the toregulate
all airports)must establishand maintaina programfor the participation in their contractactivitiesof disadvantaged businessenterprises (DBEs) which include minority-and women-ownedbusinesses. The governing Department of Transportationregulation specifies that DBE representation should equal 10 percentof gross revenuesfrom all leasingactivity(Gite, 1991). AAs who have long-termleaseswith in non-DBE concessionaires must providefor DBE participation the form of a subleasearrangement. Ordinarily,minority businesssetasides such as this one beget minimal compliance (Black, 1987). Accordingly,in the case of airportconcessions,the seeminglylogical expectationis that DBEs will usuallybe subcontractors, that the and prime contractor,acting as a monopolist, will assign subcontractors (especiallyDBEs) to the worst locations in the airport,keeping the most profitable locationsfor themselves.1However,carefulconsideration of the institutional structureof airportsdoes not support this expectation. Rather,we show that all of the playersin an airport, including the DBEs, are in a monopoly-like noncompetitivegame, and have no financialincentiveto discriminate, to compete. or

Eachsupplier decides it is better play that to be somedistance away.3 the noncompetitive game. In the noncompetitive game,the substidemand inelastic, keeping tutesaredistant, is and above prices comboth and levelsincreases revenues profits.Thus,in large petitive airto of are where ports, there likely be multiple suppliers thesameitem, are of concessions a typical Because example oligopolistic competition. cost is theopportunity of substitutes relatively themultiple high, supmarket charge can that not the within captive pliers prices reflect only cost costs their ownproduction butalsothecustomers' opportunity of exceed Theseprices thosethatwouldbe charged the if substitutes. were but market perfectly competitive, theyarelessthanthosea pure wouldcharge. monopolist to Governments, givingthe AA the authority regulate by airport concession pricesso that theydo not exceedcomparable pricesin the locales the outside airport, nearby implicitly recognize potential in is forairport market failure.Market failure possible large airports, wherethereis oligopolistic as competition, wellas in smallairports, or where monopoly near monopoly supply one or twoconcessions by the that is likely.Nonetheless, despite regulatory authority AAsposof at still to the sess,prices goodsandservices airports appear exceed outside pricesof comparable goodsand services purchased airports. ForAAs,havingthe authority regulate to pricesis not the sameas to the the having incentive regulate prices.To thecontrary, AAhasa clear incentive to regulate, to prefer and to comnot supracompetitive
petitive prices, becauseits revenuesare greaterwith noncompetitive

Expected Consequences
The primaryactorsin the politicaleconomy of an airportare the AA and the concessionaires. The AA is assumedto be a revenuemaximizer, and the concessions are assumed to be profit maximizers.2 When only one concessionprovidesa servicewithin an airport,that concession can chargea price that equals the cost of providingthe product plus the opportunity cost to the consumer of buying the productat a location outside the airport. Such a priceclearlyexceeds competitivelevels. The singlesupplierin this caseis happy,becauseit receivessupra-competitive profits. The AA is also happyand has little incentive to make the single supplier reduce its supra-competitive prices. In this scenario,there is only one effectiveprovider,and no real substitute goods, since the substitutesare some distance away. Demand is consequentlyinelastic. When demand is inelastic,a percentage increase in price results in less than a percentagedrop in quantitydemanded,so raisingthe price producesincreasedrevenues (which are price times quantitysold). The additionalrevenuesmean more profit for the concessionand more revenuesfor the AA, which collectsits percentage from the concession's sales. The concessionwill stop raisingits pricesonly when profitsdrop. However, many airportshave numerousprovidersof a particular product-often adjacentto one another,or nearlyso-and one would anticipatethat competition should drive prices down. No provider has an incentiveto competewith other providers the samegood or of service. If one merchant were to drop prices, airport consumers would flock to that location, and the other merchants would have to lower their pricesaccordingly avoid going out of business.Because to each merchant sells goods that are substitutes for one another, demandwould become elastic,priceswould drop to competitivelevels, and profitswould drop as well. Everymerchant who providesthe same good or servicecan foreseethis outcome. The alternative to is play a noncompetitiveprice game. Without any conspiracy comor municationwith other suppliers, is in the individualinterestof each it supplier of the same good or service inside an airport to maintain supracompetitive pricesand to exploit the fact that consumers relare ativelycaptive,becausethe nearestcompetitoroutsidethe airportmay
MonopolyPrices, MinorityBusiness, the Priceof Hamburgers U.S. Airports and at

pricesthanwith competitive prices. As long as demandremains inelastic, increases not onlyto concession price add but profits alsoto theAA'srevenues, because AAkeeps percentage eachconcesa of the sion'srevenues itself. In fact,the supra-competitive and for prices consequent monopoly-like of profits the concessions onlyaddto not the AA'srevenues, also reduceits workload.Compared a to they competitive game,the monopoly-like profits the noncompetitive of gamemeanthatfewerconcessions out of business.The consego is quence thatnewRFPs not needto bewritten newcontracts do and negotiated. Finally, although AAcouldnot overtly to renew the fail the contract anyconcession lowered prices, sanction of that its that mightbe an implicit threat an preventing irrationally benevolent concession fromreducing prices. its Theupshot thatneither AAnora prime is the concessionaire, even though theydo havemonopoly-like power,havean incentive act to as monopolists indulging preferences mighthaveto disby any they criminate DBEsbygiving against themunfavorable locations (Alchian andKessel, 1962;Broder Langbein, and 1989). To the contrary, in an airport, poorlocations meanlesspassenger traffic, fewertransactions,andlower revenues allconcessions wellasfortheAA. for as We testedfourempirical underpinnings this institutional of scenario.First, scenario based an assumption the is on aboutthe prevalenceof percentage-of-revenue contracts between AAandconcesthe sionaires between prime or a concessionaire subcontractors. and This assertion be examined can empirically. Second, explicit the prediction that DBEswill not be given inferior locationscan also be tested. we Third, argue the noncompetitive prevails in small that game both with airports, onlyone supplier a givenproduct in largeairof and ports,with multiple suppliers; a result, as indicators profitability of should no greater smallairports, be in where thereis onlyone seller, thanin large airports. Fourth, argue maximum we that product prices arenot likelyto be setandenforced theAAor by a prime by concessionaire. If, in the infrequent caseswheremaximumpricesare set and enforced, profitabilityindicatorsshould be lower than they are for concessionsin airports wheremaximumpricesarenot regulated.
261

Fifty airportswere randomlyselectedfrom the AirportOperators' Council International WorldwideAircraft TrafficReport,which is the 1989 FAAlist of total enplanements.The 50 werechosenrandomly from the 103 largestairports.Theseincludedthreecategories:largeairports (4.9 million - 27.7 million enplanements); medium airports(1.2 million - 4.8 million enplanements); small airports(.5 million and 1i million enplanements). returnenvelope. The firstmailingwas sent to a total of Information gatheredby a questionnaire with a stamped,self-addressed, was sent 243 concessionaires betweenSeptember and October30, 1992. The surveys 4 weresent to all concessions one airporteverydayduringthe at time period. All the surveysgoing to the same airporthad the same date This enabledus to determinefrom which airportthe surveywas returned,while maintainingthe anonymityof the respondingconcessionaire.It was importantto keep the concessionanonymousbut not the airport,since airportsize could be an importantvariable. Even with a follow-up to a randomsubsampleof the originalsample,we and receiveda total of only 52 responses. The follow-upincludedboth a telephonecall to concessionaires, a new surveyto those who said they did not respondto the first surveybut would be willing to respondto the follow-up. The low responseratecould have severalcauses. We found that it was companypolicy fromone of the industryleadersin airportconcessionnot to returnsurveys.Also, some concessionaires of seemedto feel that theirsurveyresponsecould be misused,even though it was anonymous. Despitethe low response rate,the distribution differentfromthe populationdistribution. the sampleby airport was not significantly size

maxito has neither muchincentive set andenforce ing concessions, concessions require mostcontracts eventhough prices, mumproduct (see to selltheirproducts prices selected airports at of A survey concessionaires 50 randomly with competitive thosein thesurroundat respon- ingarea.We asked of that is a greybox)revealed most(71 percent) theconcessionaire whether maximum seton respondents survey that reported they prices areallowed charge, withtheAA;of these,84 percent dentshada lease is the whether maximum enforced, to they to of Just paida percentage theirgrossrevenues theAA. Of theminority andwhether haveto get approval a priceincrease. onefor they rather with who hada contract the mainconcessionaire thantheAA, thirdreport thereis a maximum prices theyareallowed that on that revenues to charge; these,85 percent of gross that reported theypaida percentage their priceis that 90 percent reported the maximum of with is This that to themainconcession. evidence consistent thepresuppo- monitored enforced. thanhalf(44 percent) reported they Less or contracts.4 use the sitionabout widespread of percentage-of-revenue

Evidence Empirical

were respondents of Abouthalf (47 percent) the concessionaire werelesslikelyto be partof a to DBEs,who, compared non-DBEs, less had chain(e.g.,McDonald's); significantly recognized nationally other location, airport at as experience a concessionaire the current had locations; feweremployees; or locations, at nonairport airport locations.In short,DBEs square andhadfewer fewer feet; occupied counfirms and weresmaller moreinexperienced thantheirnon-DBE foot per the DBEsearned samerevenues square as However, terparts. (even of and non-DBEs, hadthe samenumber transactions though also 2). (Table DBEsandnon-DBEs hadstatistitheyweresmaller) per and per revenues transaction revenues full-time callyequivalent directly did the Although survey not inquire employee. equivalent just that thesedatasuggest DBEsareprobably as profaboutprofits, size. In otherwords,total giventheirsmaller itableas non-DBEs, and of per of DBEsmightbe less,but profit dollar labor capiprofits to to talinputis likely be comparable thatof non-DBEs.Both,thererents.5 monopoly to fore,arelikely collect

Table2 and BusinessEnterprises Nonof Comparison Disadvantaged BusinessEnterprises Disadvantaged Variable

chain recognized Part a nationally of DBEs Non-DBEs at of Years experience airport DBEs Non-DBEs airports at Years experience other of DBEs Non-DBEs of Nonairprtyears experience

probability (N) 1-tailed

9.1%(22) 28.6%(21) 6.3 (21) 10.5(23) 33(9 14.1(20) 1 00 .0003 05

ITB s

10.2(20)

16.3(23) Non-DBEs employees equivalent of Number full-time 16.0(21) DBEs 29.3 (23) Non-DBEs in airare rents collected small that We alsoargue thesemonopoly feet Number square of as of there be onlyonesupplier a givenproduct, well may where ports, 1,952(22) DBEs Withsuppliers. whicharelikelyto havemultiple asin large airports, 1,474(23) Non-DBEs be cannot tested Number locations this on information profits, conjecture out accurate of 2.4 (21) were competition to to DBEs if, directly.However, contrary expectation, 5.5 (21) Non-DBEs of indicators then airports, the indirect rentsin large monopoly erase foot revenues square per and per foot, revenues transaction, rev- Annual per profit-revenues square $2,965(11) DBEs thanin small enuesper employee-shouldbe less in largeairports $2,716(16) Non-DBEs in difference revones. Yetthe datain Table3 showno significant of small, Dailynumber transactions among foot,or peremployee, persquare enuespertransaction, 17.6(17) DBEs revis If the airports. anything, pattern of greater and medium, large 15.6(14) Non-DBEs then,thedata Annual Overall, airports.6 thanin small enuesperunitin large totaltransaction revenues daily per in (11) -$150.18 that DBEs with areconsistent the argument concessions bothlargeand $155.89(11) Non-DBEs rents. monopoly accrue small airports employee Annual revenues full-time per both that, We further hypothesized because theAAandtheprime $4,201(10) DBEs and from collectrevenues theircontracting sub-contract- Non-DBEs concessions $7,702(14)

.019
075 025 013 42 42 48

.26

262

Review 1994, 54, Administration * May/June Vol. No.3 Public

Table 3 and Concessions of Medium, Large Indicators the Profitability Small, of

Small(A) Variable 1,708(7) per foot Average annual revenues square per totaltransaction 68.64 (6) Average annual revenues daily 3,624 (7) per employee Average annual revenues fuill-time Medium (A) 2,622 (15) 159.08(13) 8,334 (14) Large (A) 4,300 (6) 295.65(3) 3,976 (6) F-stat. F-prob. 1.02 .38 1.05 .37 .37 .69

another: once at airports, consumers are relatively and immobile haveto travel to somedistance findsubstiThe tutegoodsandservices. high priceof an exit option by canbe exploited concessions, who raisepricesto just

belowthetotalof the costof hadto get approval a priceincrease. for Thissuggests adherence that providing goodor service the costof exitto the consumer. the plus is to a price at ceiling spotty best. has to to Eachindividual concession an incentive continue playthe If the priceceilingis enforced, if it is set low enoughto be exploitative and the noncompetitive game:in thisgame, highcostof exit such with binding, thatairport are prices competitive thosein thesur- makes so raises demand inelastic, that raising pricessimultaneously rounding we should area, observe the indirect that indicators prof- revenues of (which AAlikes) profits the and the (which concessions like). it-revenuespersquare foot, revenues transaction, revenues If any one concession per and ranks lowerprices, wereto break others and per employee-arelower,compared profitsin concessions to that wouldfollow,prices woulddrop,the suppliers wouldbecome comreported priceceiling. Datain Table4 showsthatrevenues no per petitors, there would substitutes, profits be and wouldfallto competisquare foot, per transaction, per employee and weresystematically tivelevels.Onlytheconsumers wouldbebetter off. lowerwherepriceceilings wereset andenforced, contrast revin to However, fostering noncompetitive in the the prices, AAmustalso enuescollected concessions whompricemaxima by for werenot set, with federal comply minority contracting guidelines.Theseregulaor set but not enforced. However, possibly because the smallsamof the DBEsasprime concessions assubor ple size,noneof the differences statistically are significant conven- tionsrequire AAto include at to concessions. 10 of Specifically, percent all revtionallevels.Furthermore, concessions mustget approval a contractors prime that for at mustbe earned DBEs. The result is by priceincrease actually higher had revenues square per foot,pertrans- enuesgenerated airports action,andperemployee thosethatdid not needapproval; than this that DBEs sharethe monopoly rents earnedby other airport in From equity an pointof view,thisis notan is opposite fromtheexpected direction, suggests theapproval entrepreneursgeneral.7 and that undesirable transfer. indicated As earlier, average the houseprocess not binding.Overall, tableprovides is the someevidence that entirely customers about$65,000,andtaxingthis is settingand enforcing priceceilings rare,but whenit occurs, is hold incomeof airport is it groupto help minorityentrepreneurs redistributes incomein the in potentially effective reducing revenues profits. and intended by taxing "haves" helpminorities havehisway, the to who not torically hadequal opportunity become to "haves." However, the of targetefficiency the monopoly rentis low. First,nonminority at entrepreneursairports profit fromthe highprices airport of goods Thereis no puzzleaboutwhyhamburgers othergoodsand andservices, thevertical and so equity thetransfer impaired. of is Second, services smallairports, at wherethereis onlyone seller the only not all airport and customers welloff, yet all customers, or poor, are rich alternative milesaway, morethantheydo at theneighborhood facethe high priceof airport is cost goodsandservices, the horizontal so lunchstand. Evenat large airports, where several different places may equity thetransfer alsolow. of is existfromwhichto makea purchase, is evidence supracomthere of It is well knownthat monopoly-like pricesarealso inefficient. petitive prices, leastin partbecause alternatives airport at the to items Consumers higher thancompetitive pay prices, thereis a conseand arecostly. Competition largeairports, in therefore, not drive does loss quent in consumers' surplus.Someof thislossis a hidden transpricesdown. Accordingly, indicators profof itability appear be no larger smallairports, to in wherethereis oftenjustone seller, thanin large Table4 ones,where therearemanysellers.However, we Indicators the Profitability Regulated Unregulated of of and Concessions attribute highprices airport the of goodsandservicesnot entirely market to failure rather but to 1-Tailed Probability (A) nonmarket failure.Prices airports regulat- Averageannual revenuesper squarefoot in are ed by a nonprofit airport Pricemaximumset and enforced administration colthat 1,334 (3) No pricemaximumset and enforced lectssomeof its revenues feesthatit charges 2,399 (20) from .28 airline nonairline and concessions, of whom Averageannualrevenuesper daily total transaction both Pricemaximumset and enforced use the airport sell goodsandservices the to 17.10 (3) to No pricemaximumset and enforced 143.28 (16) .12 consuming public. The AA is assumed be a to revenue maximizer, seeking always raiserev- Averageannual revenuesper fill-time equivalentemployee to Pricemaximumset and enforced 557 (3) enuesabovecurrent levels. If the AA wereto No pricemaximumset and enforced 3,406 (19) .11 raisefees chargedto the airlines,the airlines wouldeither leavethe airport paythe feesand Averageannual revenuesper squarefoot or Need approval price increase for 3,040 (9) passthe coston to thepublic, mightthenfly who No approval price increase for 2,443 (17) lessandbuyfewer itemsat the airport.Instead, Averageannual revenuesper daily total transaction the AA can raiserevenues fromairport concesNeed approval priceincrease for 197.31 (6) sions. Theconcessions to paytheAAa peragree No approval priceincrease for 137.66 (15) .30 of centage theirrevenues fromthe saleof goods Averageannualrevenuesper fill time equivalentemployee Need approval priceincrease for and services consumers.Concessions 11,702 (9) to themNo approval priceincrease for 2,980 (16) 07 selveshavelittle incentive compete to with one

Summary Discussion and

Monopoly Prices, Minority Business, thePrice Hamburgers Airports and of atU.S.

263

and airport entrepreneurs, to the fer to minority non-minority and because someconloss AA. Theremainder a deadweight to society, is concessions at goodsfromairport sumers mighthavepurchased who no and their competitive prices longermakethosepurchases, divert uses. resources lessdesirable to airports more interest among AAsin making Thereis increasing of concesthe likeshopping malls in turning management airport and must But sionsoverto "developers." aslongas thedeveloper paythe AAa percentage totalrevenues, aslongastheAAcanusethese of and income,no actorwill haveany revenues its own discretionary for at gamethat one observes incentiveto playthe trulycompetitive vie of where suppliers the samegoodsandservices shopping centers, low. The shopping analogy a mall is forcustomers keeping prices by but the perspective, it is not complete: goodone, froman efficiency failurethat at is of immobility passengers airports trulya market is malls.Yetthere alsoa nonand applies airports not to shopping to the from failure.As longas theAAcanappropriate revenues market to it for concessions its discretionary income, hasno incentive airport sinceits own utilityis charge, regulate pricesthat concessions the increasedby keeping concession prices up (Chandler, 1990). or is there no optimum forregulatory agencies commisway Although to at the the sionsto force firms levels, theyregulate setprices efficient is to in current arrangement, whichthe AAs'authority regulate not one is to with commensurate its incentive regulate, probably of the alternative wouldbe to setupAAsastypical regulatoworst.A better

ry commissions, a budget with emanating entirely froma legislature, and to rather partly than fromthoseit regulates, a mandate keepairarea. port concession pricesin line with those in the surrounding because Such an arrangement wouldnot be costlyto administer, were prices visibleandeasyto monitor. If this alternative purare cannotget revenues sued-or similar ones, in whichthe regulator wouldbe morelikelyto resemfromthoseit regulates-then airports ble shopping to mallsnot onlywithrespect the typeof merchandise of sold,butalsowithrespect theprice themerchandise. to wouldbe lower airport prices.For Fortheflying public, result the the institutions publicadministrators, lessonis that administrative are should designed thattheirmission theirincentives comand be so but mensurate.Moreover, just economics alsopublicchoice, not of officials within whichexplicitly models likelyincentives public the institutional are specific contexts, usefultoolswithwhichto accomthat institutions work. plishthisaspect crafting of public and methods I. analysis quantitative Laura Langbein teaches policy in articles Evaluation at American University.She has published of and Review, Public Choice other and journals, is theauthor DiscoverA Guide Evaluation Work: Statistical toProgram ingWhether Programs has an University, ten Len Wilsonreceived MPAat American at in and of management, teaches Embry-Ridyears experience airport dleAeronautical University.

Notes
are competitive environment in that suggesting firms anincompletely 1. Forliterature and 5. see market, Alchian than morelikelyto discriminate thosein a competitive just (1957). We showbelow whytheAAandtheconces(1962)andBecker Kessel environment. in both sionaires operate a noncompetitive cannot 6. the because AA employees to 2. The AA is unlikely be a profitmaximizer and total between revenues totalcostsaspersonal the appropriate difference legally into that the income. However, revenues exceedcostscan be transformed some (1975) Niskanen incomeforAA employees. and mix of pecuniary nonpecuniary can budget.Revenues alsobe transformed 7. as to refers this'Profit" a discretionary revemployees.Thus,for the AA, maximizing into outputby mission-oriented or for can goal,sincetherevenues be usedeither output for enuesis a veryflexible purposes. discretionary are and since may,in fact,be communication, prices visible it is easyforone 3. There suppliers. of the to supplier observe prices theother is argument thatit is theuseof percentof implication thetheoretical 4. An empirical game that contracts leadsto a noncompetitive withmonopoly-like age-of-revenue profits amongconcesof indicators higher one rents. Therefore, shouldobserve given than contracts thosewithout.However, with sionaires percentage-of-revenue indicadata and in values therevenue transactions thatareusedasindirect missing was in only torsof profitability, one concession thesample not on a percentage-ofand no data provided relevant on revenues contract thatconsession and revenue transactions. costs of and consumers absence advertising that Gite(1991)pointsto the captive business for proposition minority attractive an concessions especially makeairport persons. a woulduphold and were if Sucha pattern, the differences significant consistent, ones than airports in smaller in are that conjecture consumers morecaptive large at concessions greater bigis to cost the because opportunity of travel nonairport ones. than cityairports atsmaller the that possible no concessionaire-neither DBEsnortheothersIt is, of course and the profits,because AA has an incentive maybe able to monopoly receive For fromtheconcessionaires. profits) (i.e.,thesupracompetitive all extract therents that revenues theAAreceives, of the besides percentage eachconcession's instance, for another sourceof revenue the AA is the monthlyrentfromthe concession. received paid are payments a costfor concessions, forfromrevenues Theserental in of a receives percentage theserevenues; addiThe fromconsumers. AAalready it to rents theconcessions, is posexcessive monthly tion,if theAAis ableto charge rent all siblethattheAAwillbe ableto extract theeconomic fromtheconcessions, profits.If thisis true,thenprices who thenwouldearnno morethancompetitive from will but consumers, there be no redistribution willstillbe too highforairport even the DBEs. The only entrepreneurs-not to customers anyairport airport to customers theAA airport will redistribution befrom

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