The story for Arkham City takes place about one year after the events of Arkham Asylum. Quincy Sharp, former warden of Arkham Asylum, has taken credit for stopping the Joker, and used the notoriety to become mayor of Gotham City. As neither Arkham nor Blackgate Prison are in any condition to detain inmates, Sharp buys out a large section of Gotham's slums and arms the perimeter with private military contractors from a group called Tyger in order to create "Arkham City". The prisoners are brought into Arkham City and are given free rein, as long as they do not attempt escape. To oversee the city, Sharp hires psychiatrist Hugo Strange who appears to have his own secret agenda for the city. Batman maintains a vigil over the city, worried that the situation may get out of hand. Part of the setup for "Arkham City" was contained in plans in a hidden room in Sharp's office in Arkham Asylum.
The events of the game are set in motion when Two-Face, seeking to gain notoriety among the inmates and other villains outside the city, devises a plan to publicly execute Catwoman. Batman decides for both the safety of Gotham and of his past relationship with Catwoman that he must stop the execution by entering Arkham City.