The parking problem in malls

How fair is it to charge shoppers a fee to merely enter the shop? If there is a premium experience attached to shopping there and a demand for that experience, it is appropriate to impose an entry fee. In its absence, it may not be economically viable for the shop to charge an entry fee as a commercial revenue stream. So how is it that large shopping malls in many Indian cities collect parking charges from their customers vehicles?

I can think of two possible reasons.

1. From the demand-side, the consumers/shoppers may value the mere experience of shopping in these malls and therefore may be willing to put up with having to pay the parking charge as an entry fee. The mall operators ride on this demand and capture it in the form of parking charges.

2. From the supply-side, the parking charges, which are often exorbitantantly high in cities like Hyderabad, have become a significant revenue stream for the Mall operators. In fact, the returns (by way of sales and profits thereon) from the premium outlets may be comparable to the parking charges collected from the visitors to the same outlets.

Does this "free-market determined pricing model" lead to economic efficiency all round? As could have been expected, the free-market price determination process inevitable results in the fragmentation of the different activities into separate revenue streams with their respective distortionary effects.

1. The shop-owners/franchises get away by socializing a major negative externality. They do not pay the price for the negative externality created by their customer's vehicle parking. Since this is not internalized into their costs, the shop-owner pays a smaller rent than would have been the case if all externalities were internalized. It distorts their incentives. They offer numerous promotional and other offers to attract more customers without having to bother about its social costs.

In fact, the shops make free money here. Since all these mall shops are outlets peddling branded products, their sale prices are fixed, irrespective of whether the parking charges are internalized or not. In the circumstances, by having palmed off the responsibility of arranging parking facility to the mall operator, the franchisee would see a mall space as being more profitable that having his own exclusive separate shop, where he would have to himself arrange for separate parking.

2. Instead of viewing parking as an accompaniment service to be bundled with shops, the mall operator sees the parking charges as another full-fledged commercial service from which they seek to make more money. Given the large volume of shoppers, they view it as a revenue stream with considerable commercial potential. In fact, many mall operators outsource this to another service vendor, with a contract aimed at maximizing their returns. This parking operator would naturally be left with no option but to increase the parking fees and maximize his revenues.

3. As both the aforementioned points convey, in the absence of its internalization, the price of the negative externality is now completely borne by the customer. Admittedly, the shopper has to pay the cost of the convenience of using a car for his shopping. But it is only fair that he shares it with the shop from where he makes the purchases.

This again raises the issue of whether free-markets always lead to the most efficient outcomes. A more efficient system would be one where it is regulated that parking in all malls should be free and the mall operator should collect the cost of maintaining the parking facility from the individual shops. There are several ways to apportion the parking costs on the shops. Even if some reasonable charge is collected, it could be reimbursed to the customer on production of the shopping bill. Interestingly, some shops do this, but not others. This will also help the operator gather data on which shop is the largest source of parking externality.

For sure, such regulations may create their own distortions. But I am inclined to believe that its distortions are likely to be far less inefficient than that created by the current free-market price determination model.