FTC Staff Comment Before the U.S. Department of Transportation Concerning Study of the Competitive Aspects of Gross-Receipts Fees Imposed by Airports on Off-Airport Car-Rental Companies

V890019
COMMISSION AUTHORIZED
Fees for Off-Airport Rental Car Companies
Comments 	of 	the 	Bureau 	of 	Economics l 	to 	the 	U.S. 	Department 	of
Transportation regarding the study requested in the Senate Appropriations
Committee Report on H.R. 4794.
I. 	Introduction
Congress has asked the Department of Transportation (DOT) to consult
with the Federal Trade Commission (FTC) in its preparation of a study that
analyzes 	the 	competitive aspects 	of 	gross-receipts 	fees 	imposed 	by 	airports
on off-airport car-rental companies.% 	The staff bf the Bureau bf Economics
of the FTC appreciates the opportunity to submit these comments to DOT.
In January 1989. DOT provided the FTC with a preliminairy draft of its
study.S. That draft provides a
the· major companies involved
, 	,
thorough description of
: I
in 	both on-airport :~nd
. I
i.	
,
the car-rental market,
off -a'irport opera tion,
the 	airports 	that 	currently 	assess 	off-airport 	gross-receipts 	fees. 	and 	the
present sources of airport revenues. 	The draft also analyzes recent changes
in the car-rental industry subsequent to airline deregulation.
The draft study does not address the larger (and difficult) question of
the most desirable level and structure of fees assessed on airlines. car-rental
companies. and other firms dependent on the airport. 	The most desirable fee
1 These comments 	represent 	the 	views of 	the 	staff of 	the 	Bureau of
Economics of the Federal Trade Commission. 	They are not necessarily 	the
views of the Commission or any individual Commissioner. 	Questions should
be 	addressed 	to 	James 	D. 	Reitzes. 	Bureau 	of 	Economics. 	Federal 	Trade
Commission. Washington. DC 	20580. (202)326-3349.
%The 	Senate 	Appropriations 	Committee 	requested 	the 	study 	in 	the
report on H.R. 4794. the DOT and Related Agencies Appropriations Bill.
S A Review 	of the 	Imposition 	of Gross Receipts 	Fees on 	Off-Airport
Car Rental 	CQmpanies. Report 	to the Senate Committee on 	Appropriations;
the Senate Committee on Commerce, Science and Transportation; the House
Committee on Appropriations; and the House Committee on Public Works: and
Transportation. January 1989.

structure 	would 	assess 	charges 	that 	allow 	the 	airport 	to 	meet 	its 	revenue
needs 	while 	achieving 	the 	greatest 	level 	of overall consumer 	welfare. 	To
determine that structure, one would need first to consider all of the benefits
provided by the airport (such as the reduced travel time for commercial and
private 	air 	passengers 	and 	the 	improved 	profitability 	of 	businesses 	that
depend on the airport) as well as the costs imposed by the airport (such as
the noise imposed on households located near the airport, and the congestion
costs 	experienced 	both 	by 	neighboring 	households 	and 	by 	users 	of 	the
airport.) 	After 	analyzing the 	benef,its and costs, .one could determine 	the
! 	t
schedule 	of 	fees 	(and 	possibly 	subsidies) 	that 	would 	raise 	the 	revenues
required 	by 	the airport 	in 	the 	most 	efficient 	manner. 4 	The efficient 	fee.
I
schedule may require payments from all that benefi~l from the airport. s
: 	I
, 	'
Like DOT, we acknowledge the complexity of determining the efficient
. 	··1 	: 	.
fee schedule, and 	we do not further 	address tha't issue 	in 	these comments.
Rather, for 	the remainder of this comment, we accept 	that airports charg~
revenue-based 	fees 	on 	their on-airpo.rt 	car 	rental 	companies, and 	then 	we
examine the effects of imposing revenue-based fees on off-airport car rental
companies.
4 For a 	discussion 	of efficient solutions involving 	different 	fees 	for
different users of a common facility, see Kahn, The Economics of Regulation,
(J ohn 	Wiley 	and 	Sons, 	1970) 	pages 	70-86 	and 	134-35. 	See 	also 	Ba umol,
"Optimal 	Departures 	from 	Marginal 	Cost 	Pricing," 	60 'American 	Economic
Review 265 (1970).
6 Whether 	the 	fees 	currently 	assessed 	car 	rental 	companies 	are 	those
that 	maximize 	overall 	consumer 	welfare 	is 	beyond 	the 	scope 	of 	these
comments. 	One 	cannot 	rule 	out 	the 	possibility 	that 	airports 	maXImIze
collections from landside sources (su~h as car rental companies) in order to
subsidize airside users of the airport (i.e., the airline companies and general
aviation.) 	If such subsidization were occurring, airports could alter their fee
structures and 	raise the same amount of revenue while 	increasing overall
consumer welfare.
2

II. 	Summary
Airports 	currently 	assess 	gross-receipts 	fees 	on 	their 	on-airport 	car
rental 	companies. 	The DOT draft 	contains only a 	limited analysis of 	the
rationale 	for 	extending 	gross-receipts 	fees 	to 	off-airport 	car 	rental
companies, and 	the likely 	effect of 	these 	fees on 	competition 	between on-
airport and off-airport car-rental companies. 	We develop this analysis a bit
more 	thoroughly 	highlighting the factors likely to affect 	the magnitude of
the impact on the prices, profitability and locational decisions of both off-
airport 	and 	on-airport 	car 	rental 	companies. 	In 	addition, 	we 	discuss 	the
possible effects on competition in the car rental industry.
Airport authorities may find 	it sensible to charge on-airpor~ car rental
companies· a 	higher fee 	than 	off-airport car 	rental 	companies. 	On-airport
companies may receive advantages such as on-site concession booths and the
potential for 	Quicker delivery of 	rental 	cars that are not available 	to off-
airport companies. 	When 	these 	advantages exist, we expect that consumers
(and 	hence on-airport companies) 	would 	be 	willing 	to 	pay a 	premium for
them. 	On-airport companies 	may also 	impose 	higher costs (such 	as 	traffic
congestion 	costs) 	on 	the 	airports' 	patrons 	than 	do 	off-airport 	companies.
Therefore, 	airports 	may 	have 	an 	incentive 	to charge 	on-airport companies
higher 	fees 	either 	to 	appropriate 	some 	of 	the 	value 	derived 	by 	these
companies 	because 	of 	their 	preferred 	location 	or 	to 	force 	them 	to 	take
account of the costs they impose.
The imposition of fees on off-airport car-rental companies would likely
cause price increases in the short run. 	Off-airport companies would desire
to 	charge 	higher 	prices 	to 	help 	recoup 	the 	cost 	of 	the 	gross-receipt 	fee.
Any 	price 	increase 	in 	off-airport 	car 	rental 	services 	would 	increase 	the
3

demand 	for 	services offered 	by 	on-airport 	companies. 	In 	turn. 	on-airport
companies 	would 	have an 	incentive 	to 	increase 	the 	quantity 	of car 	rental
services provided and might increase their prices.
In addition to the new revenues from off-airport car rental companies,
the 	revenues 	collected 	by 	the 	airport 	from 	the 	on-airport 	car 	rental
companies would 	increase. 	Moreover, the 	imposition of fees on off -airport
car-rental 	companies 	may 	indirectly 	increase 	the 	airport's 	revenues 	by
increasing 	the bids by car rental companies to supply on-airport car rental
services. 	The rise in the demand for on-airport services might also increa,se
the number of bidders for an on-airport location.
In addition, the imposition of fees on off-airport car-rental companies
would decrease the total supply of. services provided by these companies Jor
a ·given 	level 	of demand' for 	car 	rental 	services. 	This 	may 	be 	associated
with 	a decrease in 	the profits of off-airport companies, and a decrease 	in
the number of off-airport car rental companies at a particular airport.
Although our analysis implies that the imposition of off-airport access
fees would affect the profitability, and ultimately the supply, of off -a irport
and 	on-airport 	car 	rental 	services, 	we 	expect 	that 	in 	many 	markets 	the
number of companies would be sufficient to maintain price competition in the
car 	rental 	industry. 	That 	result 	would 	be 	more 	likely 	in 	markets 	where
entry is relatively easy.6
6 We have not examined entry conditions at individual airports. 	Such
an analysis would be necessary to determine conclusively that the imposition
of off-airport fees would not diminish competition in the car rental industry
at a particular airport.
4

III. 	A Brief Review of Gross-Receipts Fees on On-Airport and
Orr-Airport Car-Rental Companies
For many years, airport authorities have charged concession fees to on-
airport 	car-rental 	companies. 	Concession 	fees 	typically 	consist 	of 	a
percentage 	of 	revenue, 	which 	usually 	includes 	the 	daily 	rental 	paid 	by
customers 	and 	any 	additional 	charges 	for 	mileage. 	Also, 	the 	contract
between 	the on-airport car-rental company and 	the airport 	authority often
specifies a 	minimum 	payment.1 	The contract terms typically arise 	from 	a
bidding 	process 	where 	the· airport 	sets 	the 	gross-receipts 	fee 	(commonly
around 	10 	percent), and 	the 	winning 	bidders are 	those 	who' guarantee 	the
highest minimum payment. 	In addition, rental companies often pay access
fees 	for 	their 	vans. 	Finally, 	the 	on-airport 	companies 	pay 	rent 	for 	the
space 	they 	occupy, 	and 	they 	are 	often 	required 	to 	construct 	their 	own
'operating facilities.
Revenue-based fees on off-airport car-rental companies are a relatively
recent phenomenon. 	As of November 	1988, sixteen airports nationwide 'had
begun 	collecting 	gross-receipts 	fees 	from 	off-airport 	car-rental 	companies.
Memphis, the largest airport collecting fees, charges 8 percent 	to 	both on-
airport and off-airport car-rental companies. 	Kansas City charges 10 percent
to on-airport car-rental companies and 	7 percent to off-airport companies. 8
Atlanta, which currently imposes a 9-percent on-airport car-rental fee, 	will
begin 	imposing 	a' 7-percent off-airport 	fee 	in 	April 	1989. 	We 	understand
that other major airports are presently considering the issue.
1 In 	many cases, the 	mInImum 	payment is not 	binding. 	That 	is, car
rental companies pay more (based on the 10 percent fee) than they bid.
.' 	On-airport 	firms 	in 	Kansas 	City 	are 	allowed 	telephones 	but 	no
concession 	booths. 	Memphis 	has 	the same system, and 	the four on-airport
firms are located on the boundary of airport property.
5

IV. 	Rationale for a Fee Differential between On-Airport and
Off-Airport Companies
I
For a given level of demand, the revenues generated for the airport by
a 	ten 	percent 	fee 	charged 	on-airport 	car 	rental 	companies 	will 	be 	largest
when 	no 	off-airport 	companies 	are 	offering 	services 	because 	the 	services
offered by the two types of companies are, to some extent, substitutes. 	Any
increase 	in 	the 	supply 	of off-airport 	car 	rental 	services 	would 	reduce 	the
quantity 	of 	car 	rental 	services supplied 	by 	on-airport 	companies, and 	this
reduction, 	in 	turn, 	would 	reduce 	the 	revenues 	generated 	for 	the 	airport.
The 	resulting 	reduction 	in 	airport 	revenues 	will 	be 	more 	pronounced 	the
greater 	the 	extent 	to which consumers· shift 	from 	on-airport 	to off-airport
services and 	the easier that new off-airport entrants can appear. 	Thus, if
off-airport companies are not charged a gross receipts fee, airports will lose
revenues as the total Quantity of car rental services is increasingly supplied
by off·a~rport companies.9
If consumers considered 	the services of off-airport 	and on-airport car
rental companies to be perfectly interchangeable, then the benefits provided
by the airport would be the same for both types of companies and an equal
percentage· fee assessed on both on-airport and off-airport companies may be
9 The proportion of airport generated car rental 	revenues captured 	by
off-airport 	car 	rental companies 	has 	increased 	from 	approximately 	15% 	in
1982 to 30% in 1987. 	(DOT draft study, page 4.)
Even if the airport authority imposed fees on off-airport companies, it
might not completely capture the revenues from car rental companies serving
airport patrons. 	If price increases 	by off-airport car rental companies are
likely to cause consumers to switch to in-town car rental companies or other
means 	of 	transportation 	(such 	as 	taxicabs 	or 	mass 	transit), 	then 	airports
should 	attempt 	to 	account 	for 	those 	shifts 	when 	predicting 	the 	revenue
likely to be generated by the imposition of gross-receipts fees on off-airport
car rental companies. 	In-town 	car rental companies would 	then be one of
the many businesses that would be considered in setting optimal fees for all
airport dependent businesses.
6

appropriate. 10 	However, we doubt that the services of off-airport car rental
companies are 	considered 	perfect 	substitutes 	for 	the services 	of 	on-airport
car rental companies.
Consumers 	(and 	thus 	on-airport 	car-rental 	companies) 	derive 	two
principal advantages from on-site locations relative to off-airport companies.
First, 	on-airport 	companies 	typically 	offer 	a 	concession 	booth 	inside 	the
airport 	while 	off-airport companies 	cannot.ll 	Although 	the 	value 	of 	this
advantage 	has 	declined 	in 	recent 	years 	due to 	the 	reduction 	in "walk-up"
business, 	such 	accessibility 	still 	must 	be 	considered 	a 	convenience 	to
consumers.12 	Second, 	on-airport 	companies 	may 	have 	more 	conveniently
located facilities than off-airport companies. 13 	This advantage shortens the
time required by a customer to reach the rental car.
If either or both of these advantages exis.t, consumers would be willing
to pay 	more 	for 	on-airport services than 	off-airport services .. As a result,
on-airport car 	rental companies may 	be 	willing to pay a higher percentage
gross-receipts 	fee 	than 	would 	off-airport 	companies. 	Therefore, 	airports
10 Equal 	percentage 	fees 	would 	not 	be 	appropriate 	if 	off-airport
companies 	did 	not 	derive 	all 	of 	their 	income 	from 	airport 	patrons. 	In
addition equal fees might not be appropriate if on-airport companies imposed
higher costs on the users of the airport, as discussed below.
11 As 	indicated 	in 	note 	8, 	~ 	some 	airport 	do 	not 	permit on-site
companies to operate concession booths.
12 According 	to 	one 	on-airport 	company, 	·walk-up· 	business 	has
declined to approximately 10% of revenues. 	(DOT draft study, page 32.)
13 This 	may 	not always 	be 	the 	case. 	In 	many airports, customers of
both 	on-airport 	and 	off-airport 	car-rental 	companies 	are 	required 	to 	use
pick-up vehicles to gain access to their automobiles. 	Of 27 major airports,
21 	require 	the 	use 	of 	pick-up 	vehicles 	for 	all 	car-rental 	customers. 	(DOT
draft study, Table 4.1)
7

could 	charge on-airport companies 	higher 	fees 	to 	reflect 	the 	greater 	value
consumers place on the services provided by on-airport companies. I '
In addition, 	on-airport companies 	may 	impose greater congestion costs
on users of the airport than off-airport companies. 	If on-airport companies
do 	impose 	higher 	costs 	on 	airport 	patrons, 	a 	higher 	fee 	on 	on-airport
companies 	would 	help to reduce 	the costs. 	Therefore, airports may choose
to 	reduce 	congestion 	by 	charging 	on-airport 	companies 	higher 	access 	fees
than off-airport companies.
v. 	Competitive Effects Within the Car-Rental Industry of Imposing
an Off-Airport Fee in the PreseDce of aD On-Airport Fee
The DOT draft study contains the following assessment of the effects
of the imposition of fees on off-airport car-rental companies:
•... [T]he 	extension 	of 	airport 	access 	fees 	to 	off-airport
firms 	will 	change 	the competitive relationship 	between
the 	latter 	and 	the 	on-airport 	firms 	that 	are 	already
paying the fee. 	In such a highly competitive, narrow-
margin 	business, 	increasing 	one 	competitor's 	costs 	by
seven 	to 	ten 	percent 	must 	affect 	the 	relationship
between on- and off-airport car-rental companies. 	For
the off-airport operator, it will mean some combination
of 	higher 	prices, 	lower 	profits, 	or 	less 	market 	share.
For the on-airport operator, it will mean an opportunity
to either increase prices (and 	hence profits) or 	market
share, or both."IS
We generally agree with DOT's assessment, and 	in 	this section extend
the 	analysis 	in 	two 	ways. 	First, 	we 	examine 	the 	factors 	that 	affect 	the
magnitude~ of the short run price, profit, and market share effects cited by
DOT. 	Second, we discuss the likely consequences of the off-airport fees on
U 	If on-airport and off-airport companies had differing marginal costs
of 	providing 	car 	rental 	services, 	the 	airport 	authority 	may 	want 	to 	take
those 	differing 	costs 	into account 	when 	setting 	fees 	for 	the 	two 	types of
companies. 	The airport authority 	may also want to 	take into account any
rent subsidies it provides on-airport companies.
16 DOT draft study, p. 3.
8

car companies' longer run decisions to locate on the airport, locate off the
airport. or exit the industry altogether.
Consider as a starting point the situation that currently exists at many
airports: 	on-airport car rental 	companies are charged a 	revenue-based 	fee
while off-airport companies are not. 	Then. let us suppose that a revenue-
based 	fee 	is 	imposed 	on 	off-airport 	car-rental 	companies. 	When 	the 	off-
airport gross-receipts fee is imposed, the off-airport companies may consider
passing 	this 	fee 	on 	to 	the 	customer 	by 	raising 	prices. 	The 	likely 	price
increase 	becomes 	smaller 	as 	the 	services 	provided 	by 	off-airport 	and 	on-
airport 	car-rental companies become 	better substitutes. 	If 	these 	two 	types
of services are good substitutes, then a rise in the price of off-airport car-
rental 	services 	would 	likely 	cause 	a 	significant 	number 	of 	customers 	to
switch 	to 	on-airport 	car-rental 	services, 	holding 	the 	on-airport 	price
constant. I6 	In addition, price increases by off-airport car rental companies
would 	be 	restrained 	if 	they 	face 	competition 	from 	other 	off-airport 	car
rental 	companies, 	such 	as 	those 	located 	in 	a 	nearby 	city. 	that 	are 	not
subject to a gross-receipts fee.
16 The 	willingness 	of consumers 	to 	substitute 	between 	on-airport 	and
off-airport 	car-rental 	services 	is 	probably 	the 	most 	important 	factor 	in
assessing 	the effects of imposing an off-airport gross-receipts fee, or 	more
generally, 	in 	changing 	the 	relative 	fee 	structure 	affecting 	on-airport 	and
off-airport 	companies. 	Under 	certain 	market 	conditions, 	car-rental
companies may be able to create differences in the quality of their product
and 	orient 	their 	product 	toward 	different 	customer 	groups. 	When 	on-site
location 	conveys 	a 	substantial 	convenience 	advantage 	relative 	to 	off-site
location, 	then 	on-airport 	car-rental 	companies 	may 	direct 	their 	services
toward 	convenience-oriented 	customers, 	such 	as 	business 	customers. 	Off-
airport 	car-rental 	companies 	may 	orient 	their 	marketing 	toward 	leisure
customers. 	In 	markets 	where 	the 	quality 	and 	orientation 	of 	car-rental
services 	differs 	between 	on-airport 	and 	off-airport- 	companies, 	the
substitutability between the services offered by these two types of companies
is 	relatively 	less 	than 	in 	other 	markets. 	Thus, 	the 	imposition 	of an 	off-
airport 	fee 	may 	create 	a 	relatively 	larger 	short 	run 	price 	effect 	on 	a
particular segment of the car-rental market.
9

If 	prices 	increase 	for 	off-airport 	car-rental 	services, 	the 	demand 	for
on-airport car-rental services would rise. 	Thus, on-airport companies would
be 	likely to 	try 	to 	raise 	their 	prices. 	The 	likely 	price 	increase 	would 	be
greater the more costly it is for on-airport companies to provide additional
car 	rental 	services 	when 	demand 	increases. 17 	Assuming 	that 	on-airport
companies price competitively, the 	higher prices would reflect 	higher costs,
and 	the 	imposition 	of fees on 	off-airport companies 	would 	not 	reduce 	the
number 	of 	potential 	bidders 	to 	provide 	all 	or 	part 	of 	the 	on-airport 	car
rental services.
It is important to recognize that on-airport companies may be a source
of suggestions to impose revenue based fees on off-airport companies. 	On-
airport companies may have incentives to lobby airport authorities to assess
fees on their off-airport competitors. 	By raising the costs of operating off-
airport locations and thereby increasing the demand for on-airport services,
on-airport 	companies 	may 	earn 	higher 	profits. 1S 	s"uch 	a 	profit-increasing
strategy is known as non price predation. 19
17 In 	economic 	terms, 	the 	likely 	price 	increase 	will 	be 	greater 	the
steeper the short run marginal cost curve. 	Later in this section, we discuss
longer run adjustments, such as alterations in the size or location of rental
car operations.
IS See, 	Salop 	and 	Scheffman, 	"Raising 	Rivals' 	Costs," 	73 	American
Economic 	Review 	267 (1983). 	To 	raise 	price 	successfully, impediments 	to
enter 	on-airport locations 	must 	exist. 	According 	to 	the 	DOT draft 	report
(pp. 6, 31), some airports do place constraints on bidder Qualifications.
For 	the 	on-airport 	companies 	to 	benefit, 	the 	airport 	authority 	must
share the 	potential revenues. 	It is uncertain whether the airport authority
has the information. necessary 	to extract the full 	gains and may, therefore,
share the 	potential revenues with the on-airport companies. 	See Salop and
Krattenmaker, "Anticompetitive 	Exclusion: Raising 	Rivals' Cost 	to 	Achieve
Power over Price," 96 Yale Law Journal 209 (1986).
19 The FTC has previously examined the issue of non price predation in
this industry. 	In 1976, the Commission issued a Consent Order against three
of 	the 	major 	on-airport companies (Hertz, 	Avis, and 	National) 	prohibiting
10

We 	currently 	have 	inadequate 	information 	to 	determine 	whether 	the
imposition of fees on off-airport companies is a revenue collection device of
airport 	authorities. 	the 	result 	of 	a 	profit-raising 	strategy 	of 	on-airport
companies. 	or 	both. 20 	We 	note, 	however, 	that 	if 	off-airport 	fees 	are 	the
result 	of 	a 	profit-raising 	strategy 	of 	on-airport 	companies, 	antitrust 	laws
may not be able to address the issue. 	As explained in the DOT report (pp.
54-5), airport authorities may have 	immunity from 	antitrust prosecution by
the 	state 	action 	doctrine.21 	Further, 	efforts 	by 	car 	rental 	companies 	to
lobby airport. authorities mayor may not be exempt from the antitrust laws
under the Noerr-Pennington doctrine. 22
In the long run, the imposition of gross-receipts fees on off-airport car
rental companies may reduce their profitability sufficiently to induce some of
them 	to 	exit 	the 	industry.23 	Our 	own 	preliminary 	investigation 	of 	the
them 	from 	engaging 	in 	certain 	practices 	allegedly 	designed 	to 	increase
profits by creating entry impediments for 	on-airport companies. 	See Hertz
Corporation. 	et 	al, 	88 	FTC 	715 	(l976). 	The 	Complaint 	alleged 	that 	the
companies 	attempted 	to 	persuade 	airport 	authorities 	to 	establish 	bidder
qualifications for airport car rental concessions.
20 To 	make 	a 	determination, 	it 	may 	be 	necessary 	to 	address 	the
question 	of 	the 	most 	desirable 	level 	and 	structure 	of 	fees 	assessed 	on 	all
firms 	dependent 	upon 	the airport. 	As we stated 	above, this is a difficult
problem to solve.
21 See, Parker v. Brown. 317 U.S. 341 (1943).
22 See, Eastern Railroad 	Presidents Conference v, Noerr Motor Freight
Co .. Inc. 365 U.S. 	127 (l961) and 	United 	Mine 	Workers v, Pennington. 381
U,S, 657 (l965). 	Even 	if this immunity holds, car rental companies would,
of 	course, 	still 	be 	liable 	for 	antitrust 	violations 	not 	covered 	by 	the
immunity.
23 DOT 	interviewed 	firms 	at 	ten 	airports 	that 	have 	assessed 	off-
airport 	gross-receipts 	fees. 	Since 	the 	imposition 	of 	these 	fees, 	there 	has
been 	a 	net 	reduction 	of 	one 	off-airport 	firm 	in 	these 	ten 	markets. 	In
Sarasota. two off-airport firms 	have left the market, but eleven off-airport
firms remain. 	Gulfport-Biloxi has shown a net loss of one off-airport firm.
I J

effects 	of 	off-airport 	fees 	suggests 	that 	the 	number 	of 	off-airport 	car-
rental companies may be lower at airports that impose gross-receipts fees on
off-airport car 	rental 	companies. 24 	In 	most 	major 	markets. 	we 	would 	not
expect that any potential fall in the number of off-airport companies would
significantly increase the risk of anticompetitive behavior because entry into
the 	off-airport 	car 	rental 	market. 	at 	many 	locations. 	appears 	relatively
easy.25
The 	imposition 	of 	off-airport 	fees 	would 	likely 	raise 	the 	value 	of
operating on the airport premises relative to operating off the premises. 	As
the fees charged off-airport companies rise toward those charged on-airport
companies. 	off-airport companies 	may 	be 	more 	inclined 	to 	move 	onto 	the
airport 	because 	relatively 	more 	services 	would 	be 	supplied 	by 	on-airport
providers. 26 	Some 	of 	the 	increased 	value 	of 	an 	on-airport 	location 	could
most likely be recaptured by the airport authority through increased revenue 	.
collections. 	The increased 	value should also be reflected 	in an increase in
with only two remaining off-airport firms. 	(DOT draft report p. 19 and p. 29)
24 Appendix 	A 	provides 	a 	preliminary 	analysis 	which 	suggests 	the
number 	of off-airport car rental 	companies 	may 	be 	lower at 	airports 	that
assess 	gross-receipts fees 	on 	off -airport 	car 	rental 	companies. 	For 	reasons
discussed in the Appendix. we caution that our analysis should be considered
preliminary.
25 While we have not examined 	this issue in detail. the recent growth
in the number of off-airport companies and the market share commanded by
them 	suggest 	that 	entry 	barriers, 	at 	least 	in 	some 	markets. 	are 	minimal.
Entry 	conditions 	differ 	across 	airports. 	however. 	and 	the 	conditions 	at 	a
particular 	airport 	would 	need 	to 	be 	examined 	before 	concluding 	that
potential entry at that airport was relatively easy.
We also note that the imposition of off-airport gross-receipts fees 	may
make entry more difficult than before. 	These fees 	would raise the cost of
doing business for any prospective entrants.
26 However. if the airport 	places constraints on 	bidder qualifications.
off-airport companies might not be able to bid.
12

the 	bid offered 	to secure an 	on-airport concession. 	Accordingly, when 	the
existing 	contracts 	between 	the 	airport 	and 	its 	on-airport 	car 	rental
companies 	expire, 	the 	bids 	to supply 	on-airport 	car 	rental 	services 	should
rise 	from 	their 	previous 	levels. 21 	In 	addition, 	the 	on-airport 	car-rental
companies may 	alter 	their 	facilities 	to allow 	them 	to 	handle the 	increased
demand 	for 	on-airport car rental 	services more efficiently. 	In sum, a car
rental company's decision 	to locate on or off the airport 	premises, and 	its
decision 	regarding 	the 	size 	of 	its 	operation, 	may 	be 	strongly 	affected 	by
changes in the fce structure.
21 Our analysis suggests 	that 	on-airport 	car 	rental 	companies 	may 	be
willing to pay a higher percentage fee than off-airport car rental companies.
Even 	if 	both 	types 	of companies 	pay 	the 	same 	percentage 	fee, 	car 	rental
companies 	would 	be 	willing 	to 	bid 	for 	the 	right 	to 	locate on 	the 	airport
when 	an 	on-airport 	location 	provides 	consumers 	(and, 	hence, 	car 	rental
companies) with benefits relative to an off-airport location. 	A competitive
bidding 	process 	for 	the 	rights 	to 	on-airport 	concessions 	would 	reveal 	the
differential value of an on-airport location, and permit the airport to collect
some of the value of the differential benefits. 	For a discussion of various
auction mechanisms and their properties, see Harris & 	Raviv, -A Theory of
Monopoly Pricing Schemes with Demand Uncertainty; 71 American Economic
Review 347 (1981); McAfee & McMillan, -Auctions and Bidding: XXV Journal
of Economic Literature 699 (1987).
13

VI. 	Conclusion
Airport 	authorities 	currently 	charge 	on-airport 	car 	rental 	companies
fees based on gross receipts. 	To the extent that an on-site location conveys
certain advantages over an off-airport location, it may be sensible to place a
higher 	fee 	on on-site companies than on off-site companies. 	As on-airport
and 	off-airport 	car-rental 	services 	become 	better 	substitutes 	over 	time, 	a
given fee differential would be more likely to affect the locational decisions
of these companies. 	Finally, although the decisions of car rental companies
and their profits will be affected 	by any change in revenue-based fees, we
expect that in many markets potential entry would be sufficient to maintain
price competition in the car rental industry.
14

Appendix A
Other things equal, one would expect the proportion of total car rental
services 	supplied 	by 	off-airport 	car 	rental 	companies 	to 	be 	smaller 	at
airports 	that 	assess 	off-airport 	access 	fees. 	We 	do 	not 	have 	data 	on 	the
proportions 	of 	total 	car 	rental 	services 	provided 	by 	on-airport 	and 	off-
airport 	companies 	at 	various airports. 	Still, 	the 	DOT 	draft 	study 	reports
data 	on 	the 	number 	of 	each 	type 	of 	company 	at 	various 	airports. 	We
examined 	whether 	airports 	that 	assessed 	off-airport 	fees 	have 	fewer 	off-
airport car-rental 	companies 	than 	airports 	without 	these 	fees 	by 	regressing
the 	number 	of 	off-airport 	car-rental 	companies 	on 	five 	variables: 	I) 	a
constant, 2) the number of originating passengers at the airport (in millions).
3) a 	dummy 	variable indicating whether the airport is located in a 	tourist
market, 4) the proportion of residents in the city served by the airport who
use public transit to commute to work; and 5) a dummy variable indicating
whether 	off-airport 	gross-receipts 	fees 	are 	imposed. 	We 	would 	expect 	the
first three variables to be positively related to the number of off-airport car
rental companies and the last two variables to be negatively related.
Our 	sample 	includes 	forty-three 	airports 	cited 	at 	some 	point 	in 	the
DOT draft study, sixteen of· which had 	imposed 	gross-receipts fees 	on off-
airport 	car 	rental 	companies 	by 	1988. 	The 	coefficients 	(and 	t-statistics)
genera ted by the regression are as follows:
constant
number of originating
passengers (in millions)
tourist dummy
percentage of residents who
use pu blic transporta tion
off-airport fee dummy
Coefficient
4.516
0.327
6.461
-0.111
-2.640
t-st3 tistic
3.912
3.583
5.338
-1.556
-2.198
These 	results 	indicate 	that, 	at 	a 	5-percent 	level 	of 	significance, 	the
number of off-airport car-rental companies is positively affected by the size
of the airport and whether the airport serves a tourist market. 	Further. the
coefficients on the off-airport fee variable and the percentage of commuter
variable are negative and the coefficient on the fee dummy is significantly
different 	from 	zero 	at 	the 	5-percent 	level 	of 	significance. 	Thus, 	this
evidence provides limited support for the conclusion that airports that assess
gross 	receipts 	fees 	on 	off-airport 	car 	rental 	companies 	have 	fewer 	off-
airport companies. 	(When the dependent variable is the total number of on-
airport 	and 	off -airport 	car 	rental 	companies, 	the 	regression 	results 	are
qualitatively unchanged.)
W-: 	emphasize 	that 	these 	results 	are 	preliminary. 	Due 	to 	the 	recent
impo5ition 	of 	some 	of 	~hese 	fees, 	the 	number 	of 	off-airport 	companies
currently 	in 	operation 	may not 	represent 	the 	full 	impact of these 	fees 	on
competitive conditions. 	We have also assumed that the off-airport companies
cited 	in 	the DOT draft report are independent businesses. 	If some of 	the
off-airport 	businesses 	are 	jointly 	owned, 	the 	dependent 	variable 	for 	that
market would overstate the number of independent off-airport companies .. In
15

addition, 	the 	airports 	in 	this 	sample 	that 	assess 	fees 	on 	off-airport 	car
rental companies tend to be markedly smaller than those in the sample that
do 	not 	collect 	such 	fees. 	It 	is 	unclear 	whether 	those 	differences 	are
adequately controlled for by the originating passenger variable. 	Further. the
results may 	be sensitive to the relatively small number of observations and
to alternative specifications of the determinants of supply and demand in the
car-rental industry (e.g., the number of automobiles per 	thousand 	people in
the 	metropolitan 	area 	served 	by 	the 	airport 	may 	be 	superior 	to 	the
proportion 	of 	residents 	who 	use 	public 	transportation 	to 	commute). 	DOT
may wish to consider whether a more extensive analysis of these data would
be useful. 	(Data sources: DOT draft (January, 1989) Tables 3.3, 3.4. 3.6, and
4.3; Airport Operators Council International; and State and Metropolitan Area
Da ta Book, Department of Commerce (1986».
16