Pricing of mall services in the presence of sales leakage

For a shopping mall, sales leakage occurs when consumer purchases facilitated by the mall are finalized outside it. These sales include, for example, catalog orders filled at the leased premises in a physical mall; For an Internet mall, they include the ones consumers make on an on-line store’s website after learning about the store from an Internet mall website. While these sales are difficult to track in the physical mall, Internet malls like Yahoo can track them by placing cookies on consumers when they visit the mall. The challenge for a mall owner then is to design an appropriate pricing model which takes sales leakage into account. In fact, Yahoo currently uses an All-Revenue-Share Fee with Yahoo collecting from on-line stores a share of all sales revenue, regardless of whether the purchase was made through the mall or directly from the store’s own URL. We explore this new All-Revenue-Share Fee model, compare it with the commonly used Fixed Fee model and the two-part tariff model, and identify the model with the highest profits for the mall under different conditions. We suggest that although an All-Revenue-Share Fee is appealing for Internet malls due to its ability to capture sales leakage directly, it may cause the stores to refrain from joining the mall in certain circumstances. Thus, in certain situations charging a fixed monthly fee can actually be more profitable for the mall versus the All-Revenue-Share Fee model. We also examine how mall and product category characteristics as well as market expansion affect the optimal pricing strategy. We show that a mall should price discriminate across product categories, not just by charging different amounts of fees, but by using different pricing models. Our research provides many managerial implications on how to price over time.