Transcript Location Patterns Dominated by Dispersive Forces

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 outputtransfer 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