E. Market Areas and Central Place
Theory
Want to examine cities in a
larger regional economy
1. Market areas
Area where firm can
underprice its competitors
- Want to look at
consumer behavior (demand) and how it
affects firms - previously only looked at
firm's behavior (supply)
- Competition => if
economic profits are being made, firms
will enter market (region) until only
normal profits are made
a. Market area
determination
(1) Graphical analysis
.
.
.
.
.
.
.
.
.
.
.
(2) Algebraic model
d = per capita
demand
e = population
density (per mile)
A = total land area
(square miles)
q = output per
store = amount sold
- Q = total demand
in region = d * e * A
Ex. -
.
.
- N = number of
stores in region = Q / q
Ex. -
.
.
- M = size of market
area = A / N
M = q / (d * e)
.
.
Ex. -
.
.
b. Factors affecting market
areas
Assume fixed demand
(1) Economies of scale
Increase in
economies of scale => q increases,
M increases
Ex. -
Automobiles
.
.
(2) Travel costs
Travel costs
decrease => q increases (easier to
transport or to reach store), M increases
Ex. -
.
.
.
(3) Per capita demand
d increases => M
decreases
Ex. -
Grocery stores
.
.
.
(4) Population density
e increases => M
decreases
Ex. -
.
.
.
(5) Income
Higher income =>
d increases, e decreases
=> effect on
market area (M) is unknown, depends on
income elasticity of demand for land and
for the product
c. Law of demand
- Relax assumption of
fixed demand, take law of demand into
account (price and quantity demanded are
inversely related)
(1) Decrease in travel
costs
- Effect on M
uncertain because q increases, d
increases (price decreases)
.
.
.
.
.
.
.
.
(2) Economies of scale
- Effect on M
uncertain because q increases, d
increases (cost, price decrease)
d. Different industries
- Scale economies large
relative to per capita demand => small
number of firms, large market areas
- Scale economies small
relative to per capita demand => large
number of firms, small market areas
Ex. -
Restaurants
2. Central place theory
Industries have different
market areas, different location patterns
Minimum convenience
- gas stations, grocery stores, church
Full convenience -
restaurants, hardware stores, drug stores, bars,
barber shops, hair salons, banks
Low-order specialty
- laundry, clothing, appliances, hotels &
motels, shoes, sporting goods
High-order specialty
- paint, music, antiques, furniture, automobiles
Ex. - Assume perfect
substitutes, single purpose shopping trips,
ubiquitous inputs, uniform demand
.
.
.
.
.
.
- Activities with the
same market areas will locate together -
shared parking, roads, and infrastructure
(economies of agglomeration)
- Central places result
when activities locate together
- Hierarchy develops
depending on number of services offered
a. Implications
(1) Diversity of city
sizes results because products have different
scale economies and different market areas
(2) Small number of
large cities, large number of small cities
(3) Customers travel to
bigger cities, not smaller or same size
cities
(4) Doesn't follow
exactly - some small areas contain higher
order goods, some large areas missing some
lower order goods
(5) Gives indication of
new business possibilities
b. Relaxing the assumptions
(1) Scale economies
Larger stores,
larger market areas, fewer stores, fewer
cities
(2) Imperfect
substitutes
Leads to comparison
shopping => similar stores locate near
one another
Ex. -
Clothes
.
.
.
.
.
(3) Complements
People buy goods on
the same shopping trip =>
complementary stores locate near one
another
Ex. -
Restaurants, movie theater
- Scale economies,
imperfect substitutes, and complements do
not disrupt urban hierarchy
(4) Variation in demand
Demand could be
higher or lower as city size increases
Ex. -
Theaters, farm equipment
.
.
.
.
.
(3) Resource-oriented
firms
Firms locate near
inputs
Ex. - Bat
factory
(4) Local
input-oriented firms
Locate near cheap
labor, energy, intermediate goods
Ex. -
Research and development
- Variation in demand,
resource-oriented, and local
input-oriented firms may or may not
disrupt urban hierarchy
|
