Thursday, August 4, 2011

The Most Frustrating Local Monopoly

Economists typically have an ambiguous attitude towards monopolies. When the monopoly arises because one company is providing the single most popular good or service, opinions often differ between educated and well-meaning people as to what to do. Some people worry about the potential for predatory pricing and other schemes to shut down new entrants, and want the government to step in. Others figure that the the market will eventually take care of it - you can sue Microsoft for bundling Internet Explorer with Windows to shut down Netscape, but eventually IE will be replaced by Chrome and Firefox anyway.

But the worst kinds of monopoly are those granted by government fiat. Because then there is little possibility of new entrants displacing the artificial monopoly.

My entry for the category of 'most frustrating and insidious government-granted monopoly' that I've come across is currency exchanges at airports.

At certain airports (Sydney being one that comes to mind), the government allows only one company to be the exclusive currency exchange for the whole airport. I think in Sydney it's Travelex. So you can walk around and find multiple currency exchanges, but they're all Travelex.

And this is an incredibly devious thing to do.  Travelex makes extra money by charging a higher spread (buying at lower prices and selling at higher prices) than they could sustain if they had competition two metres away.

The reason they can get away with this is twofold. Firstly, most people need foreign exchange pretty soon after leaving the airport. But even more tricky is the fact that most people have very little idea what is a competitive exchange rate at any point in time. Even if you check the exchange rate on the internet, this will tell you the midpoint. But what's a reasonable spread if you want to exchange $200? Unless you've been paying attention to what other places in previous airports were offering that day, it's not at all clear.

And this is how Travelex launders its monopoly profits. It's one of the few cases where most people don't have a strong sense of the fact that they're being ripped off.

So why does the government do this?

Simple - they charge Travelex higher rents in order to be the monopoly provider for the airport. In essence, they split the monopoly rents with Travelex. If they're auctioning off the right to be the monopoly provider, my guess is that the government ends up getting most of the rents.

So here's a hearty up yours to the Government of New South Wales for ripping off citizens. Again.

[Update]: Loyal reader BW pointed out to me that Sydney airport is actually owned by MAp Airports, a subsidiary of Macquarie Bank. In addition, some reading around informed me that this privatisation was carried out by the Australian Federal Government, not the NSW Government. So the main post unfairly besmirches the reputation of the New South Wales Government, which is deeply dysfunctional for a number of reasons, but this is not one of them.

BW is quite right, of course. Monopoly pricing is not any more appealing when carried out by a private corporation (especially in an arena, like airports, where there's not exactly a viable threat of competition).

It turns out I'm not the only person to notice this trend at Sydney Airport. According to Wikipedia:
In March 2010 the Australian Competition and Consumer Commission released a report sharply critical of price gouging at Sydney airport, ranking it fifth out of five airports. The report noted Sydney Airport recorded the highest average prices at $13.63 per passenger, compared to the lowest of $7.96 at Melbourne Airport, while the price of short-term parking had almost doubled in the 2008–09 financial year, from $28 to $50 for four hours. The report also accused the airport of abusing its monopoly power.
Let the record stand corrected - up yours, MAp Airports!


  1. In case of multiple exchange offices I would be willing to bet that the rates would be very similar while taking the utmost care to ensure there was no paper trail pointing to collusion. The best alternative would be to force the exchange office to operate a number of ATM machines as part of the contract and that the fee for those machines should be very close to the normal fee structure (i.e. outside airports).

  2. It's actually even easier than that. When it's two separate companies, they have to figure out how to collude without leaving a paper trail. When it's all one company, you just announce 'New policy, all rates are set at company headquarters' - it's perfectly legal for different branches to help each other out and not compete with each other.

    What you actually need is free entry into the market for rental space at the airport. But then again, if you had a government willing to allow this, you wouldn't have had the problem in the first place. But ATMs are a good answer too - I tend to get cash there instead, and refuse the locally offered ATM exchange rate.