Part 1: Market Areas and Firm Location

Analysis

>Location can make or break a business enticing firms to an area

creates jobs and increasing wages,incomes , local tax bases,and
property values. What factors does a firm consider where to locate?
.where they can maximize the return on their investments?
.proximity to specific inputs or customers
.the place where the amenities offered
.transportation costs--agglomeration economies
>various mosels of firm location behavior
Ch.2:shoping model
Ch3:a model of urban hierarchy
Ch.4: shipping model
Ch.5: agglomeration economies
Ch.6:spatial pricing patterns
Ch.2 Linear Market Areas_hopping Models(s-2)

>Shopping Models:
The competitive behavior of firms that sell directly to consumers,
assuming the consumers pay all transportation costs (the retail trade ,
service industries, manufacturing firms if input costs are identical).
>From Demand Functions to Price-distance functions
____Assumptions of Mosels in Spatial economics
.the transport costs are constant and consist of both out-of-pocket
costs and psychic costs
.the transport costs per unit of distance are constant
.each of the consumers only buy one article,not stocking up or buying
in bulk.
Ch.2 Linear Market Areas_Shopping Models(s-
3)
>basic model

price

Price-distance function
Demand

8
Distance 5
Q
Ch.2 Linear Market Areas_shopping Models(s-
4)
>Dynamics of market areas –when the Mill (store) price changes

price

6 Price-distance function
Demand
4
2 8
Distance 5
Q
Ch.2 Linear Market Areas_shopping Models(s-
5)
>Dynamics of market areas –when transport costs changes

PD2 PD1
price
PD3

Price-distance function
Demand
4

8
Distance 5
Q
Ch.2 Linear Market Areas_shopping Models(s-
6)
>Dynamics of market areas –when the D-Curve shifts

price

Price-distance function
Demand
4

8
Distance 5
Q
Ch.2 Linear Market Areas_shopping Models(s-
7)
>Price Elasticity of Demand and Distance
% Q
.the formula for elasticity of demand: , (1, or  1, or 1)
% P

price

Elastic demand
Slope=1
Price-distance function Unit elastic Demand

Inelastic demand
8
Distance 5
Q
Price-Distance function & elasticity of demand
Ch.2 Linear Market Area_shopping Models(s-8)

>Hotelling’s Linear Markets model (Harold Hotelling ,1929)

______spatial Duopolies with perfectly inelastic demand

A B Q

Unstable market areas for a duopoly

 Ch.2 Linear Market Areas_shopping Models(s-
9)
>Hotelling’s Linear Markets model (Harold Hotelling ,1929)
______spatial Duopolies with elastic demand

10

16 8 8 16 Q
Distance
market areas for monopoly when the demand has a limit price,10 dollars
 Ch.2 Linear Market Areas_shopping Models(s-
10)
>Hotelling’s Linear Markets model (Harold Hotelling ,1929)
______spatial Duopolies with elastic demand

$9

$7

i Firm A K J
Firm B
Q1 Q2 Q3
market areas for Duopolists when their demand curves have a limit price
 Ch.2 Linear Market Areas_shopping Models(s-
11)
>Hotelling’s Linear Markets model (Harold Hotelling ,1929)
______spatial Duopolies with elastic demand

C
demand curves for a duopoly when one has higher transport costs
 Ch.2 Linear Market Areas_shopping Models(s-
12)
>There’s a crowd
______The extention of Hotelling model by Lerner and Singer(1937)
and Eaton and Lipsey(1975)(identical products, a linear market,
moving is costless).
How three firms relocate to share the market

A’

B’
A C’
B

#Until the three share one-third of the market area equally, four firms
share one –forth of the market,and so forth.
#The minimum market area (a firm to have a normal profit) is called
it’s threshold size.
 Ch.2 Linear Market Areas_shopping Models(s-
13)
>Challenging the principle of Minimum Differentiation
______Hotteling assumed that the firms only have to choose the
location---they never choose what price to charge( but in
reality…..)
______D’Aspremont, Gabszewicz,and Thisse(1979): the firms can
change their locations and their prices

Firm A Firm B
Q1 Q2 Q3
Duopoly when one firm lowers its priceprice
 Ch.2 Linear Market Areas_shopping Models(s-
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>Challenging the principle of Minimum Differentiation
______Bertrand Model of oligopoly behavior

Firm A Firm B
Q1 Q3
Price Shading
*strategies:
(1)Keep a higher price (and lose all sales)
(2)Set an equal price (and share the market)
(3)Set an even lower price (and capture the entire market)
 Ch.2 Linear Market Areas_shopping Models(s-
15)
>>One way for firms to achieve equilibrium in a linear market is
to produce heterogeneous products (price are not identical)
______clustering of firms creates economies of agglomeration
_______lower search costs for consumers
_______proximity of firms gives consumers chance to comparison
shop
>>Consumer search behavior and Firm location
___Travel to shop behavior
.one trip, multipurpose and multi-stop shopping
.commuter shopping behavior
____shopping center s and retail agglomeration
.reducing search costs for consumers

( .stores in a shopping Mall can prosper: anchor stores generate

positive externalities for neighboring firms (attracting consumers)
 Ch.2 Linear Market Areas_shopping Models(s-
16)
>
>Summary & conclusions