• Look at the impact of consumer decisions

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1.  Monopolistic competition in location

a.  Assumptions

(1)  Product differentiation

• Differentiation by location and accessibility

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(2)  No artificial barriers to entry

• Relatively free entry into the market

• Some startup costs

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b.  Short-run and long-run equilibrium

• Suppose economic profits in the short-run

• Firms will enter until economic profits are eliminated

c.  Spatial context

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2.  Market areas

a.  Market size

• Citywide demand = d (p) * N

d (p) = per capita demand

N = city population

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• Low per capita demand => larger population needed

• High per capita demand => smaller population needed

Ex. - Restaurants

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b.  Differences between cities

• Goods and services with low per capita demand found only in large cities

Ex. - Museum exhibits, live music performances, specialized retailers, medical procedures

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c.  Differences across industries

• Industries have different market areas, different location patterns

- 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

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3.  Central Place Theory

a.  Assumptions

(1)  Fixed population

(2)  Ubiquitous inputs - all inputs available at all locations

(3)  Uniform demand - per-capita demand is the same at all locations

(4)  Perfect substitutes - no necessity for comparison shopping

(5)  No complementarity between goods - single purpose shopping trips

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• 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

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b. Implications

• Diversity of city sizes results because products have different scale economies and different market areas

• Small number of large cities, large number of small cities

• Customers travel to bigger cities, not smaller or same size cities

• Doesn't follow exactly - some small areas contain higher order goods, some large areas missing some lower order goods

• Gives indication of new business possibilities

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c. Relaxing the assumptions

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(1) Imperfect substitutes

• Leads to comparison shopping => similar stores locate near one another

Ex. - Clothes

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(2) Complements

• People buy multiple goods on the same shopping trip => complementary stores locate near one another

Ex. - Restaurants, movie theater

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• Imperfect substitutes and complements do not disrupt urban hierarchy

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(3)  Variation in demand

• Demand could be higher or lower as city size increases

Ex. - Country music, opera

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(4) Resource-oriented firms

• Firms locate near inputs

Ex. - Saw mill

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(5)  Local input-oriented firms

• Locate near cheap labor, energy, intermediate goods

Ex. - Research and development

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• Variation in demand, resource-oriented, and local input-oriented firms may or may not disrupt urban hierarchy

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