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The examination of the conditions under which the market area of a firm is determined. This type of analysis is important both to industrial location and to the provision of services. For any industrial organization, control over a sales territory is of some relevance to locational choice and plant viability. Some further aspects of market-area analysis in industrial location are discussed under Hotelling model and variable revenue analysis.
The derivation of a market area for the single plant is explained in the figure. A plant is located at A, in the (one-dimensional) space represented by the horizontal axis. The cost of producing one unit or a given volume of output is represented by C. The commodity is sold to the customers, ranging along the distance axis, at a price that includes production cost and transport costs (represented by tA). A price p is the most that the consumers are prepared to pay for the commodity, a condition assumed to be constant in space. Under these simple conditions, the market area for the firm located at A will be bounded by the points MA and M\'A, where delivered price is just equal to the maximum that the consumer is prepared to pay. Introducing the second distance dimension and rotating the edge of the market line about A would generate a circular market area.
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market-area analysis
Relaxing the assumption of a single firm in isolation and introducing a second plant at B, the figure illustrates the effect of locational interdependence on market competition. Firm B is able to offer the commodity at a lower delivered price (tB) than A in the section of A\'s market area extending from MA to X. On the assumption that consumers purchase from the cheapest source of supply, this area would now be transferred to the market area of firm B. As other firms enter the industry, space should gradually be filled up and market areas whittled down to the minimum size consistent with profitable operation by a process of competition, as elaborated in the central place theory associated with Walter Christaller and August Losch.
In reality, market areas will be more complex in both form and derivation than in this simple model, because of the actual nature of consumer preferences, behaviour, pricing policies and competitive practice (cf. hinterland). (DMS)
Suggested Reading Smith, D.M. 1981: Industrial location: an economic geographical analysis, 2nd edn. New York: John Wiley, chs 4 and 9. |
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