The Shopping Center Chronicles – Space Allocation

Like the other rent factors detailed in our previous installment of the Shopping Mall Chronicles, space allocation also plays a significant role in the rent tenants play.

In 1993, J.K. Brueckner provided a comprehensive theoretical analysis of the problem of optimal space allocation in shopping malls. His paper dealt with agency theory and principal-agent relations.

Under Brueckner’s model, each tenant’s sales revenue increases at a decreasing rate as both own-space (the store’s space) and the space of all other externality-generating stores increases. Rents and space allocations corresponding to rents are all chosen to maximize profits for the developer, taking account the externalities. Their own externalities, as well as those of the other tenants, affect all shopping mall tenants. The only costs considered in Brueckner’s model are the developer’s marginal cost of space.

To maximize the developer’s profits, space is allocated to each store to the point where net marginal revenue is equal to the marginal cost of space, less an externality term, all adjusted by each store’s elasticity of demand. Stores’ rents often differ because of their differences in demand elasticity and externality-generating capabilities. Each store’s rent is affected by its external effects on other stores, along with how a marginal increase of its space increases or decreases the rents paid by other stores. So, under this rent model, stores that create the greater externality typically pay a lower rent per unit of space.

This is the third installment in The Shopping Mall Chronicles. Visit our blog to read the other articles in this series.