Question from Past Microeconomics Qualifying ExamEdit

Fall 2004 - Section II, Question three, George Mason University

Research done by Peter Pashigian et. al. found that a clothing or shoe store in a super-regional shopping mall (a mall with at least three major department stores) pays about ten times as much rent per square foot as department stores. Jewelry stores pay 20 times as much. On the other hand, department store sales per square foot (per period) averaged $131, while that of clothing stores was $237, shoe stores $259 and jewelry stores $555. How might the rental differentials be explained? Would your answer also explain why shopping mall developers have incentive to purchase very large land parcels?



The Mall: J = Jewelry Store; C = Clothing Store

It makes sense that when a mall developer is creating the layout for a mall, they have incentive to worry about which department stores are attracted to the mall. This can be seen as the "draw" or the "anchor" why people would choose to come to a certain mall over another. These stores will pay less per square foot as a function of their size and the fact that they get people to the mall in the first place. In contrast, a clothing or a shoe store wants to be near a department store. They make sales because of convenience. Someone walks by the store and notices that something is on sale there, or they just shop at the stores which are near the one-stop department stores. In the diagram presented we see that clothing stores would be on the halls between the department stores, making it so that they have more foot traffic. The jewelry store has the most foot traffic being at the most visible place in the mall. The rents will be bid up by the demand for the different stores. If jewelry stores pay the most, they evidently want to be at the prime location. Clothing stores benefit from being near the department stores.

In the area surrounding a mall the retail stores will benefit from the increased traffic from people being drawn to the mall to shop. If a developer wanted to internalize this positive externality he could buy a large amount of land around the shopping center before it was developed and gain the rents from the store wanting to be near the mall. It is not the case that the developer would simply buy as much land as possible; instead he would buy only the land which internalized his own positive externality.

For this part See Also: WEW-083

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