Location Patterns Dominated by Dispersive Forces

Location of Units Relative to Others

• Clusters/zones– Fashion garment firms are found in clusters– Carpet industry, (North Carolina)– Auto dealers concentrate in linear clusters

• Despite some regulation and market power, most patterns arise as a result of individual decisions from many different units

Personal Choices vs. systematic, rational decisions

“………individuals and business firms (particularly new and small firms) must make location decisions in the face of great uncertainty, and they are strongly influenced by personal preferences and constraints not closely related to any calculation of money cost, revenue, or profit. But the location pattern of an activity as a whole cannot be understood simply in terms of the factors governing individual unit locations. Here we have to recognize explicitly the role of competition and other kinds of locational interdependence among units”

Reconciliation

• Business mortality can reconcile erratic decisions with systematic business patterns

• “Large Mistakes” may, in part justify themselves as they alter the environment. – Wal-Mart in Bentonville Arkansas

• Branch Locations– Starbucks, Fast food chains, etc.

Patterns and Firm Attributes

• Firms can find advantages or disadvantages from locating nearby similar firms– “input oriented firms” more likely to cluster?– Consider auto dealers (common markets and

land values?)

Dispersed Locations--Considerations

• Dispersed local inputs (not puzzling or interesting)– Crop processing

• Competition for inputs– Firms and households– Competition for space is one of the most prominent

• Output oriented firms following consumers and income– Relatively uniform products, survive on “market areas”– Convenience stores/drug stores

Size Tradeoff and Chains

• Smaller firms require smaller spatial market areas and face fewer transfer costs

• Size can have advantages– Shared management costs, economies of size

in input markets, etc.

• Chains could provide “best of both worlds”– “small firm market area”– “large firm” administration

The Market Area of a Spatial Monopolist

• When price increases some customers remain (contrary to a price taker)

• This consideration ads “space” to the contributors of what could cause a monopoly

The Market Area of a Spatial Monopolist

• Consider a firm in a fixed location and with fob pricing + transfer cost– Variable delivery costs– Buyer pays shipping– Buyer travels to the store

• In this case the spatial monopolist will have access to a “market area” that is traceable

Pricing strategy

Non-linear market area

Spatial Demand Function

Multiple Sellers

• Standardized output, equal operating costs for all sellers, and transfer costs increasing linearly with distance

• The market-area boundary will be a straight line that bisects at right angles a line drawn between the two locations.

• For all markets on one side of the line, the seller on that side has the advantage of lower output-transfer cost; on the other side of the boundary, the other seller has the advantage.

Illustration

Uneven Costs

Uneven Transfer Costs

Non linear, uneven transfer costs

Overlapping areas

Cost absorptions

• Shipping– Non continuities in shipping charges

• Buyers– Fail to adequately recognize transfer costs– Overvalue “fob” pricing

• Sellers– Strategic deviations from fob+ pricing

Price Discrimination

• Monopolist transfers half of the transfer cost to the nearby consumer

• Intuition is that monopoly has “more power” over those nearby

• Illustration:

Spatial competition

• No space involved, firms would engage in cournot or bertrand

• With space, pertrand dosen’t result in price=mc pricing

• Cournot competition can be solved in a similar manner as the traditional example, but the reaction functions differ

• Cournot with location decisions would be solved by reverse induction