Geography Reference
In-Depth Information
Price/Cost
b'
a'
O
A
B
L
Market of Firm A
Market of Firm B
Z
Figure 3.10
Spatial market areas: a one-dimensional model with equal
transport rates
from firm
B
, the delivered price of the good is given as (
p
b
1
t
b
d
b
). In this
model, for reasons of simplicity we can assume that consumers are evenly
distributed along the line
OL
, and that rational consumers will buy from
whichever firm is able to supply at the lowest delivered price at their par-
ticular location. In order to understand how the behaviour of the consum-
ers determines the market areas under these assumptions, we first note
that in Figure 3.10 the total market area will be divided into two areas
OZ
and
ZL
. The reason for this is that between
O
and
Z
, the delivered price of
firm
A
, given as (
p
a
1
t
a
d
a
), is always lower than the delivered price of firm
B
, for all consumers located between
O
and
Z
. Similarly, at all locations
between
Z
and
L
the delivered price of firm
B
, given as (
p
b
1
t
b
d
b
), is always
lower than that of firm
A
, for all consumers located between
Z
and
L
.
Although firm
A
is more efficient than firm
B
, and although both firms
produce an identical product, firm
A
does not gain all of the market, nor
does firm
B
disappear. The reason is that geography, in terms of location
and space, gives each firm some monopoly power over the area around
itself. The result in Figure 3.10 is that even though firm
A
is more efficient
that firm
B
, firm
A
is not able to capture all of firm
B
's market, because
the transport costs associated with shipping firm
A
's goods to locations
close to firm
B
increase the delivered price (
p
a
1
t
a
d
a
) of firm
A
's goods to
an uncompetitive level in the vicinity of firm
B
. As such, firm
A
is unable
to compete for sales and market revenue in the vicinity of firm
B
, simply
