Download Understanding Market Areas & Economic Strategies for Urban Development - Prof. Jeffrey Car and more Study notes Development Economics in PDF only on Docsity! ECO 490 Topic 4: Market Areas and Economic Development Strategies I. Demand and market areas A. Demand in a spatial setting 1. The essential point here is that, from the customer’s perspective, the effective price of a good is a function of both the selling price and transportation costs. As the distance a consumer must travel to purchase the good increases, so does the effective price of the good. B. Implications 1. Businesses have to find effective ways to compete for more distant customers. a. Focus of 1) reducing travels costs, 2) reducing the disamenities associated with travel to a particular location. II. Competition for markets A. Positive economic profits and the incentive for entry 1. Monopoly versus monopolistic competition versus perfect competition a. In all cases, economic profits act as an incentive for entry into the market. b. Entry reduces economic profit c. In the case of monopolistic competition and perfect competition, economic profit falls to zero. 2. The implication is that the existence of positive economic profits is an indicator that additional firms should be able to enter and successfully compete in the market. B. Threshold demand and range Suffice to say that depending on the firm’s production costs, there is minimum threshold population the firm must be able to reach to break even. C. Determinants of market size 1. Economies of scale: increase the size of the market area because reduced production costs can offset some amount of increased transportation costs. Here we hold transportation costs constant. 2. Demand density: reduces market size because it supports increased competition in a given area. More firms can enter and still earn a normal profit. 3. Transportation costs: effect is ambiguous and depends on the relationship between production costs and transportation costs. Here we hold production costs constant. III. The urban hierarchy and urban system Here we are examining the relationship between market areas and the development of cities. A. Central-place theory 1. Agglomeration economies may be realized when two or more firms locate close to each other, i.e., in a central place. In such a case, the firms find it beneficial to share a given market area. 2. Firms with similar threshold areas tend to group together. 3. Smaller towns tend to be populated almost exclusively by firms with smaller threshold areas. 4. Larger towns can support firms with larger threshold areas (but include the smaller firms as well). 5. This concept is useful because it helps in identifying situations in which the addition of a new business would be profitable (and sustainable). B. Changing urban patterns 1. Changes in transport costs, economies of scale and demand densities can all affect/alter urban hierarchy and the viability of certain cities. IV. An evaluation of the central-place approach A. Relaxing the assumptions The preceding results are based on a model that assumes homogeneous production and transportation costs (transportation costs increase with distance) and no product differentiation. The question is, how does reality compare with the model’s outcomes, i.e., when these assumptions are relaxed? 1. Spatial differences in production costs In reality, production costs vary across locations. The model does a better job of predicting activities that are market driven, e.g., services, than it does with activities that are cost driven, e.g., manufacturing. 2. Transportation cost variations Block pricing in transportation can cause markets to overlap. A relevant question here is how likely such a strategy is as fuel costs rise. 3. Seller rate absorption and price discrimination Sellers may price discriminate against nearby customers to subsidize those who live farther away in order to expand their markets. This causes markets to overlap as well. 4. Institutional factors Regulations, taxes, etc., can affect locational decisions which may in turn affect market areas. 5. Product differentiation Product differentiation and brand loyalty can result in market overlap. 6. Nonemployment residential locations and communities The increase in bedroom communities has altered the urban landscape.
