Guess what: monopolists gouge customers!

USA Today wrote Friday about how travelers are mad at airport shops that gouge customers. I was reading this in the dead tree paper on the flight home Friday; this would be ironic except that USA Today oversamples travel-related news for its readership, which is mainly travelers.

A few sample paragraphs:

[Frequent flyer Sammy] Tawil's irritation is shared by many travelers, who see themselves as captive to whatever prices retailers charge at a time they're spending more hours in airports and despite efforts by many facilities to prevent gouging.
…
Once you go through security," [Larry O’Neill] says, "you're at their mercy. It's like, 'We can charge anything we want. It's either you eat here or not eat at all.' "

Frequently purchased items at post-security shops in particular, such as bottled water, food and breath mints, are noticeably more expensive than in street stores, travelers say.

Wow! So once you’re inside security, you have less choice, less competition and pay higher prices! Dog bites man!

It turns out, there is one thing they can do to increase competition and cut prices:

Some airports are taking other steps to hold down prices, such as taking retailing out of the hands of a single, or "master," concessionaire and leasing to individual store owners.

"There's no competition" when retail stores are concentrated in the hands of a master concessionaire, says Mark Knight, president of BAA USA, an airport retail developer. "And what you get is higher prices."

At least 12 airports, including Boston, have eliminated the master concessionaire recently, Knight says, and the result not only is lower prices but greater overall sales.

Even with such competition and (claimed) efforts by airports to keep terminal prices closers to street prices, there still is an airport premium. An official airport industry spokesman claims that prices are higher because operating costs are higher. Airport backers claims that the average in-airport location generates 3x as much revenue per square foot — a somewhat misleading figure since may airport shops are much smaller than their external counterparts.

One thing only hinted at in the article: the role of airport owners in raising costs. USA Today quotes one concessionaire paying 2-4% more (as a royalty on net revenues). DFW airport reports the margin as 5% more than outside; Denver charges luxury retailers 10-14% of sales. Meanwhile, a NYC real estate blog estimates LAX rent as $238/square foot.

There is no alternate supplier and no competition for retail space inside the security gates (except in those rare metropolitan regions with two airports owned by two operators). Thus, there’s more than a little hypocrisy by airport owners (i.e. governments) who say “don’t gouge your customers” and “pay us as much as possible.”

As the “street price” movement has concluded, at some point price increases reduce total revenues. However, while both owner and concessionaire have different profit maximizing, and thus their interests are usually not perfectly aligned.