Geography Reference
In-Depth Information
to represent those MNEs rationalizing across international differences
in factor costs, endowments and levels of development (i.e.
efficiency
seekers
, and in particular those named in Chapter 2
global value chain
efficiency seekers
).
2
However, MNEs also employ location strategies
which are based primarily on
market seeking
behaviour and, in order to
understand the nature of the latter, we need to make the geographical and
spatial aspects of market areas faced by firms explicit in our models. This
requires us to employ a different set of analytical location techniques. In
what follows we employ two such models to illustrate the issues involved:
the Hotelling and the Salop spatial competition models. They differ fun-
damentally from the Weber type models because of their treatment of the
market area. This allows us to derive different insights into the nature of
firm location strategies, and one of the key issues which becomes evident
is that geography and space can confer
monopoly power
on firms. In par-
ticular, firms are seen to engage in spatial competition by adjusting their
location behaviour so as to try to acquire monopoly power. This leads to
questions regarding the
interdependence
between firms in terms of their
strategic decision-making and, as we will see, in an oligopolistic setting the
location behaviour of an individual firm becomes inextricably linked to
the location decisions made by its competitors.
In order to understand the relationship between market areas and
monopoly power we can adopt a diagrammatic approach based on the
framework originally developed by Tord Palander (1935). In Figure 3.10
we have two firms
A
and
B
located at points
A
and
B
along a one-
dimensional market area defined by
O- L
. For this model we assume that
both firms are producing an identical product. In Figure 3.10 we examine
the case where the production costs are different between the two firms
while the transport rates faced by them are the same. In the diagram, the
production costs
p
a
of firm
A
at location
A
can be represented by the ver-
tical distance
a'
, and the production costs
p
b
of firm
B
at location
B
can
be represented by the vertical distance
b'
. Meanwhile the transport costs
faced by each firm as we move away in any direction from the location of
the firm are represented by the slopes of the transport rate functions. As
we see here the transport rates for the two firms in this case are identical,
i.e.
t
a
5
t
b
. As is also very clear from the diagram, in terms of pure produc-
tion firm
A
is much more efficient than firm
B
.
In a standard non-spatial model of competition between two firms, a
duopoly, the firm which is more efficient will dominate all of the market.
However, in the case of an explicitly spatial market such as
O- L
, this is not
necessarily the case, as firm
B
is still able to survive.
For any location at a distance
d
a
away from firm
A
, the delivered price
of the good is given as (
p
a
1
t
a
d
a
), and for any location at a distance
d
b
away
