Retailers’ unequal rents
Exercise
Pashigian and Gould found that in largeshopping centers rents paid by retailers were very different.[1] Department stores paid an average of 11 times less than shoe storesand 20 times less than jewelries. (1) How can you explain these unequal rents? Ifthe urban geography of a country impedes the development of new shopping centers,(2) how will this situation affect the number of department stores? (3) Why?
[1] Pashigian, B Peter, and Eric D. Gould, 1998. “InternalizingExternalities: The Pricing of Space in Shopping Malls,” Journal of Law & Economics,41(1): 115-42.
Analysis
1. Department stores produce positiveexternal effects. The firm managing the shopping center realizes that it has tocompensate them accordingly. It seems that retailers of luxury goods benefitthe most, perhaps for their largest mark-up or the possibility of them being insmaller number in shopping malls. This has also been observed after the openingof department stores in city centers.
2. The number of department storeswill be lower.
3. High transaction costs ofcontracting with the small stores around the department stores. In fact thedepartment stores face resistence by established merchants, who lobby municipalauthorities to delay or impede the opening. The merchants opposing the openingare not, obviously, the ones located near the site of the planned departmentstore.
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