Locational rent vs. monopoly rent on the side-businesses of transport infrastructure

This paper analyzes the relationship between locational and monopoly rents, developing a model consisting of an airport, shops at the airport, and shops at another (non-airport) location. When the unweighted sum of the utility of the representative consumer and the airport profit is maximized, no monopoly rent exists and thus, monopoly rent is independent of locational rent, but a higher locational rent results in a lower social welfare in equilibrium. On the other hand, when the airport profit is maximized, monopoly rent is an increasing function of locational rent. An increase in locational rent reduces welfare in equilibrium if the effect of the locational rent on the demand of the good sold at the airport is small. As a special case, we demonstrate that the monopoly rent can be separated from locational rent if the demand function of the good sold at an airport is multiplicatively separable regarding locational rent. Another extreme result occurs when the airport and non-airport goods are perfect substitutes: we derive one-to-one relationship between monopoly and locational rents, i.e., an increase in locational rent by one unit immediately implies an increase in monopoly rent by the same amount. Imperfect competition for shops at an airport and another location partly modifies the results, which suggests that market structure in the goods market affects the relationship between monopoly and locational rents. Our analysis demonstrates that in general, locational rent affects monopoly rent and social welfare and the dichotomy between locational and monopoly rents does not hold.