Market Areas, Central Place Theory and Spatial Competition

(http://faculty.washington.edu/krumme/450/marketareas.html)

1. Review: Partial spatial analysis of supply and demand facets

2. Micro-Economic Demand Analysis (Review your Micro-Economics text!)
   • utilities and indifference curves
   • elasticities and cross-elasticities of demand
   • consumption and shopping behaviors (see, e.g. Bacon)

3. Deriving the "Free-Flowing Spatial Demand Cone/Curve" (Loesch/Parr)
   • individual consumer demand structure at a location
   • aggregate demand structures relative to a supply location (f.o.b.)
   • marginal (spatial) revenue curves
   • c.i.f. considerations

4. Equilibrium Market Areas (Review Economic Geography texts; also Parr)
   • average and marginal cost curves versus demand and revenue curves
   • nature of equilibria (with & without profits)
   • market areas: "threshold range"; "range of a good"; etc.

5. Central Place Theory
   • History, Purpose, Assumptions
   • system of market areas for ONE product or service
   • multiple product system of market areas
   • Christaller and Loesch compared (Boventer)
   • Problems, inconsistencies, extensions

6. Spatial Competition (Beckmann)
   • Spatial Price Discrimination (with given supply locations)
     • theoretical case: c.i.f. price=dependent variable
       

       "A simple calculation shows that the best discriminatory price increases at half the rate of transportation costs: The monopolist charges a monopolistic mill price, p_o=(a-b/c)/2b, which depends on the demand function and on marginal cost only, and he absorbs half the freight to the buyers'location (ref.to Singer 1937).... It means that the nearby customers whose demand is relatively inelastic are charged relatively more, in relations to cost, than the distant customers." (Beckmann, 1968, p.31)

       .
     • Basing point pricing || Pittsburgh Plus etc.

   • Hotelling Model: Location = dependent variable
     • History, Purpose, Assumptions
     • Monopolist's location; Duopoly, 3 suppliers?
     • Equilibria with distance-elastic demand
     • Payoff Matrix

7. Site Selection in Markets:
   • Site Selection Resources
   • Site Selection "Rules of Thumb" for Pizza Franchise

Basing Point Pricing

A pricing method under which prices are quoted to include transportation from one (or more) given point(s) [= single or multiple basing point system] regardless of the location from which actual shipment is made.

c.i.f.

Cost, Insurance & Freight to destination included in price quoted

Delivered Price

The price which includes freight charges to the location of the buyer.

Price Elasticity

of supply or demand = sensitivity of supply or demand to changes in price

Income Elasticity

of demand: with all prices constant, the change in quantity demanded of a consumption good relative to the change in income.

f.o.b. pricing

Free On Board: Mill base pricing. A pricing system in which prices are quoted for delivery at the point of production with the buyer to pay freight from that point.

Free Spatial Demand Curve

Aggregate demand schedule (price/quantity of demand function) of consumers distributed in space with varying distances from a given, central location with "price" to include transport costs from this location to consumers; it is "free" (flowing) in that it is not constrained by neighboring competitors. (Parr).

Partial Equilibrium

As applied to locational analysis, an equilibrium represents a balance among interdependent locational forces. A partial (as different from general) equilibrium theory of location focuses on just one or a few selected relationships (e.g. between locational access and effective demand).

"Pittsburgh Plus"

a form of spatial price discrimination based on oligopolistic collusion. The mill price at one location determines the delivered price at all locations regardless of the plant from which delivery is actually made.

Range of a Good

The maximum distance over which a business can sell its goods

Threshold

Minimum demand necessary to support a business

Internet Sites:

Article on Super Bookstores ("Midnight Special Bookstore Annoyed by Superstores." These articles present some of the anger and difficulties that "superstores" have created for independent bookstores and their communities.)

Literature: (Spatial Competition)

Jovanovic, Miroslav N., Geography of Production and Economic Integration. London: Routledge, 2001. [HF 1025 J66 2001 Suzz] Ch.3: "Market Structure and Geography of Production, pp.75ff.

Todt, Horst, "Wettbewerb durch Standortwahl inder Flaeche: Die Cournot- und die Stackelberg-Loesung," in: Behnke et al, (Todt, editor) Beitrage zur Standortforschung. Schriften des Vereins fuer Socialpolitik, Band 227, 1994 (Duncker & Humblot), pp.75ff. [HT 388 B45 1994]