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Large stores and contracting for mall locations

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  • Tarun Sabarwal

    (Department of Economics, University of Kansas)

  • Randal Watson

    (Department of Economics, University of Texas)

Abstract

We analyze the contracting problem between a shopping mall and potential anchors (large stores) in a market where consumers with high search costs must choose shopping destinations prior to learning prices. Our model incorporates the interaction between contracting and asymmetric firm sizes into a framework of competing platforms. The mall is but one of three potential destinations in the market, complemented by a stand-alone location for a large store, and a competitive ‘downtown’ centre occupied by small retailers. As in Dudey’s (1990) homogeneousgood framework, consumers choose to visit only one of these locations, based on expected prices at each site. A game of sequential contracting for slots at the mall determines the equilibrium distribution of firms across locations based on their costs and relative bargaining power. We analyze the effects of three policies. First, prohibition of the stand-alone site can increase social welfare, by alleviating excess entry and countering inefficiencies in contracting between the mall owner and potential anchors. Second, subsidies for downtown may push prices at the mall closer to socially efficient levels, but can never increase welfare if the market is initially dominated by a stand-alone big store. A subsidy’s effect on the equilibrium size distribution of mall tenants depends on the concavity of demand. Third, a merger between two big stores can increase social welfare, in part by ameliorating a problem of externalities on non-traders in the contracting with the mall owner. Merged anchor stores that operate at stand-alone sites may retain occupancy of mall space for purely strategic reasons, in order to deter entry.

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Bibliographic Info

Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 201007.

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Length: 45 pages
Date of creation: Oct 2010
Date of revision: Oct 2010
Handle: RePEc:kan:wpaper:201007

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  1. Pashigian, B Peter & Gould, Eric D, 1998. "Internalizing Externalities: The Pricing of Space in Shopping Malls," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 41(1), pages 115-42, April.
  2. Volker Nocke & Martin Peitz & Konrad Stahl, 2007. "Platform Ownership," Journal of the European Economic Association, MIT Press, MIT Press, vol. 5(6), pages 1130-1160, December.
  3. Miklós-Thal, Jeanine & Rey, Patrick & Vergé, Thibaud, 2010. "Vertical relations," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 28(4), pages 345-349, July.
  4. Gould, Eric D & Pashigian, B. Peter & Prendergast, Canice, 2002. "Contracts, Externalities and Incentives in Shopping Malls," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3598, C.E.P.R. Discussion Papers.
  5. Konishi, Hideo & Sandfort, Michael T., 2003. "Anchor stores," Journal of Urban Economics, Elsevier, vol. 53(3), pages 413-435, May.
  6. Basker, Emek, 2005. "Selling a cheaper mousetrap: Wal-Mart's effect on retail prices," Journal of Urban Economics, Elsevier, vol. 58(2), pages 203-229, September.
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