Location Theory I

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Location Theory I

• Week Seven

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Locational Interdependence or Market Area School 1

• Critiques on Least Cost School
• Least total cost is meaningful in industrial
  location only in conditions where demand is a
  spatial constant
• As soon as demand varies spatially, least cost
  location may not necessarily yield maximum profits

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Locational Interdependence or Market Area School 2

• Location Interdependence
• Market is not a point market, but a spatially
  distributed market
• The spatial pattern of plant location and market
  areas is a product of variations from place to
  place in demand and of the locational
  interdependence of firms.
• But no spatial cost variations -- limitation

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Locational Interdependence or Market Area School 3

• How a situation of equilibrium would be achieved
  under conditions of imperfect competition-a
  central question
• Hotellings Ice Cream Seller Model
• Duopolists two ice cream sellers with identical
  products
• Customers distributed along a seaside beach,
  with each purchasing one ice cream in one unit of
  time infinitely inelastic demand
• Firm A enters the scene first, then where should
  B locate?

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Stability of Hotellings Model

• Each seller has a monopolistic control over its
  own market area
• What will happen if a third seller moves in?

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Inconsistencies in Hotellings Model 1

• What will happen when we relax the assumption of
  inelastic demand?

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Inconsistencies in Hotellings Model 2

• Is it realistic to think of market-areas
  separated by some rigid indifference line?
• Product differentiation by seller A (inventing
  some special toppings) may attract some customers
  of seller B
• The case of central agglomeration vs. the case of
  distance-apart locations

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Competitive Strategies with cost and price
variations
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Integration of Least-Cost and Locational
Interdependence Approaches 1

• Melvin Greenhut
• Transportation, processing costs, the demand
  factor
• transportation freight cost comprise a large
  part of total costs transfer cost vary
  significantly at different location
• Processing costs labor, capital, and taxation
• The demand factor elasticity of demand and
  location
• Cost-reducing and revenue increasing factors

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Integration of Least-Cost and Locational
Interdependence Approaches 2

• Melvin Greenhut
• Cost-reducing and revenue increasing factors
• Cost-reducing factor gains that arise from
  agglomerating and deglomerating
• Revenue increasing factors external economies
  that affect sales, ex. advantages gained from
  personal contacts
• He also consider the purely personal
  considerations that provide the entrepreneur with
  psychic income
• The maximization of total satisfaction vs. profit
  maximizaton

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Integration of Least-Cost and Locational
Interdependence Approaches 3

• Melvin Greenhut
• The choice of a maximum profit course of action
  implies perfect knowledge and certainty as to
  what will follow. Under the conditions of
  uncertainty, profit potential and the risk of
  making a loss may vary with location. Certain
  location may offer a wider range of possibilities
  while other a narrower range of possibilities.
• Then which one would you pick? The status of
  companys finance and the entrepreneurs attitude

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Rise of Regional Science 1

• Walter Isard
• Combination of the frameworks of von Thunen,
  Losch and Weber ? a general theory
• Weberian sites and cities in the Thunen-Losch
  hierarchy
• Fusion of location theory with other branches of
  economic theory
• Substitution principle substitution principle
  among production factors can be applied to site
  selection process among alternative locations

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Rise of Regional Science 2

• Isard also stresses much importance of the
  transport factor
• Four conventional factors (land, labor, capital,
  and enterprise) and distance input
• Emphasize the important role of transport inputs
  in production and distribution processes

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Isard locational equilibrium and substitution
approach 1

• Start with a locational triangle with a market
  (C) and two material deposits (M1 and M2)
• Initial problem find the optimum location,
  given certain assumptions regarding freight rates
  and quantity of material needed, for a plant at
  some set distance from one corner of the
  triangle, say, three miles from C.

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Isard locational equilibrium and substitution
approach 2
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Isard locational equilibrium and substitution
approach 3
Substitution of transport inputs
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Isard locational equilibrium and substitution
approach 4-1

• Where will be the optimum or least-cost location
  be along the curve ST?
• Assumption production requires one tone of
  material from M1 and one ton from M2
  transportation rates are the same and
  proportional to distance

An Example of Equal Outlays Equation
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Isard locational equilibrium and substitution
approach 4-2
Every point on the equal outlay lines indicates
the same total transport costs with different
combination of inputs (M1 and M2)
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Isard locational equilibrium and substitution
approach 5

• However, the optimum location we obtained is at
  an arbitrarily chosen distance. For the true or
  full equilibrium points, we need to repeat this
  process.
• Isard allows location theory to be stated in a
  form comparable to that of most production theory
  some kind of integration with other aspects of
  economic theory