Airport city and downtown store competition and regulation under incomplete information

Abstract

Many airports have evolved into "airport cities" by expanding their business ventures beyond traditional goods and services to include hotels, convention centers, and shopping complexes. These airport cities, often referred to as airport malls, now directly compete with downtown stores due to their increasingly similar range of products and services. Both air passengers and local residents can choose to shop at either the airport mall or downtown stores. We model the government's optimal regulation of airport cities under potentially incomplete information regarding their true operational costs and service quality. Our analytical results suggest that airports can earn "information rent" in the form of higher profits when the government lacks complete information about the operational cost of airport mall. This incomplete information results in distortions in airport aeronautical charge and airport mall shopping price. Our findings indicate that it is more socially efficient for the government to allow airports to earn an "information rent" through higher aeronautical profits, with the direction of airport price distortion depending on the price elasticity of air travel demand. In contrast, the government's incomplete information about airport mall service quality does not lead to distortions compared to the complete information scenario. We also examined outcomes under different airport city regulation regimes: regulation by the central government (centralization), local government (localization), and both governments (dual regulation). Dual regulation results in the most significant airport pricing distortion, benefiting airports with the highest information rent. However, this approach still yields greater social welfare than localization. Consequently, the central government always has an incentive to intervene in airport city regulation. Nevertheless, our numerical simulations indicate that central government regulation under incomplete information could result in worse social welfare outcomes than no regulation at all.