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A device for estimating the likely volume of sales attainable from alternative plant locations. It is an application of the general concept of population potential, which also forms the basis of the gravity model. It rests on some very specific assumptions as to the prevailing demand situation: that the level of sales at any market will be proportional to some initial local magnitude there, and that this will decrease with increasing distance from the source of supply. There is thus the implicit assumption of a downward sloping demand curve and an f.o.b. price (whereby the cost of transportation is met by the consumer; see pricing policies).
The market potential, or estimated volume of sales (M), attainable from any plant location i is given by:
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where Q is some initial measure of magnitude of the size of the local market at j, and T some measure of the transfer cost from i to j, or the rise in delivered price with increasing distance from the plant: summation is over all n markets. The magnitude of Q is usually measured by size of local population or by per capita income or retail sales, in the absence of a more accurate basis for the estimation of size of market for the commodity in question. T may be measured by the prevailing transport costs, but this is more usually taken simply as linear distance between production points and markets.
When M is calculated for a set of possible plant locations, the one with the largest market potential can be identified. Market potential at alternative locations can be used to interpolate a market potential surface. If revenue is expected to be proportional to volume of sales, and if this is actually identified by the market potential formulation, then a market potential surface can act as a revenue surface (see variable revenue analysis).
The practical application of the concept of market potential is severely limited by the stringency of the assumptions on which its prediction of likely sales is based. These rarely exist in reality. The market potential concept has been used rather indiscriminately in economic geography, often in circumstances where it is not appropriate to the empirical situation. (DMS)
Suggested Reading Smith, D.M. 1981: Industrial location: an economic geographical analysis, 2nd edn. New York: John Wiley, 275-8. |
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