Question

Jones is the manager of an upscale clothing store in a shopping mall that contains only two such stores. While these two competitors do not carry the same brands of clothes, they serve a similar clientele. Jones was recently notified that the mall is going to implement a 10 percent across-the-board increase in rents to all stores in the mall, effective next month. Should Jones raise her prices 10 percent to offset the increase in monthly rent? Explain carefully.

Short answer

The manager should not increase the prices in his two stores.

Step-by-step solution

Introduction 

It is important to bear in mind that the manager of both stores in the shopping mall, despite having differentiated products, has the same clientele. Therefore, any increase in prices can reduce profits and increase the market share of the rival store.

To explain Jones should raise her prices 10 percent  

Faced with an upcoming $10\%$rent increase in all stores implemented in all stores, the manager is faced with the decision to increase their prices by$10\%$ to offset this increase.

In the short term, this decision does not seem very beneficial, since if the price of the two store increases, the other rival stores will not follow it in this decision and will maintain a lower price to obtain a greater market share when the rent increase is established in the shopping mall.

On the other hand, this increase in rent corresponds to a fixed cost, which would not have an impact on the marginal costs of the two stores and therefore on prices.

Thus, the manager should not increase the prices in his two stores.