Market Areas and Systems of Cities

1. Market Areas and Systems of Cities Chapter 3 1

2. Deriving a quantity-distance function 2

3. Demand cone • Demand cone shows the quantity that a spatial monopolist sells to people who live at each distance from its location. • Volume of a demand cone is the firm’s total revenue 3

4. Demand cone 4

5. Market area of spatial monopolists 5

6. Overlapping market area of two spatial monopolists 6

7. Evolution of circular market areas into hexagonal market areas 7

8. Honeycomb of long–run equilibrium market areas 8

9. Threshold size market area • The size of the market area that only allows a firm to earn normal profits: no excess profits. • Each industry has a different size market area. 9

10. Effect of threshold market area on spatial monopolist 10

11. Overlapping market areas for three different industries 11

12. Central places • Smallest are order 1, and provide level 1 goods (basic needs) to its residents. • Level 2 goods are provided by an order 2 city to its residents and to residents of smaller cities. • All centers of higher order also provide goods of lower levels to the residents. 12

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16. Instability of urban hierarchies • Primarily due to changes in transport and communication systems • Better roads and better communication systems in general cause large cities to grow, and smaller ones to die more quickly 16

17. Studying competing centers • Fetter’s law of market areas: • Ignores retail agglomeration economies of larger cities • Data expensive to gather. 17

18. Reilly’s Law of Retail Gravitation • No theoretical model • Two competing centers will attract consumers from a third location in direct proportion to their respective sizes and in inverse proportion to the relative distances to the consumers’ locations • Larger cities have wider markets • Cannot account for effect of lower prices in smaller towns 18

19. Rural cities and economic growth • Small cities are not good catalysts for economic growth. • Small cities are associated with smaller multipliers. • Spending through small cities benefits the larger cities in that hierarchy 19

20. Limitations of Central Place Theory • Assumptions underlying urban hierarchies never conform perfectly to the model • Central place theory explains pre-Industrial Revolution urban systems • Applies mainly to shopping models 20

21. Limitations of Central Place Theory • Goods/ideas never flow up the hierarchy • Theory lacks an equilibrium • Ignores results of local trade restrictions and artificial barriers of doing business (linguistic, political boundaries) • Ignores diseconomies of agglomeration that may cause people to want to move to lower-order places. 21

22. Implementing Riley’s Law • Calculate the market area boundaries. • Approximate the trade area population. • Calculate the trade area capture (TAC) to determine the number of “customer equivalents” served by that industry. • Determine the pull factor to see if the area is attracting people from outside its region or losing customers to another region. • Forecast potential sales. 22

23. Calculate the market area boundaries • Distance from the smaller city to the trade area boundary: 23

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25. Map of Adamsville and surrounding minor civil divisions 25

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27. Minor civil divisions within the trade area for Adamsville 27

28. Trade Area Capture • Number of customer equivalents = 28

29. Pull Factor • Pull factor > 1: area is serving customers from outside its nature trade area boundaries • Pull factor = 1: area is only serving local customers • Pull factor < 1: some customers going elsewhere to shop. 29

30. Potential sales • Note: per capita means divided by population. 30