Geography Reference
In-Depth Information
because it is too far away. In contrast, firm
B
is successful in selling close
to its own location, even though it is less efficient in terms of production.
As we have seen, transport costs are thus a form of spatial transac-
tions costs which provide a degree of protection for some inefficient firms
against the more efficient firms. Other forms of spatial transactions costs
are tariffs, customs duties and border taxes, as well as some knowledge
and information costs which will be discussed in later chapters. The actual
degree of spatial market protection which is provided to the firm by the
transport-transactions costs associated with geography is manifested in
terms of the scale of the local market monopoly power which an inefficient
firm still exhibits. Only in the case where transport rates are zero is a lower
production price sufficient to ensure a more efficient firm to capture all of
the market.
The diagrammatic spatial monopoly analysis depicted in Figure 3.10
can now be extended to also allow for differences in transport rates
between firms. Figure 3.11 provides three different hypothetical examples
of how spatial market areas might be demarcated.
In the first hypothetical example depicted in Figure 3.11a, although
producer
A
exhibits much lower production costs than producer
B
, firm
B
still has a monopoly power over its local market because its transporta-
tion costs are much lower than firm
A
. This is a more extreme case of the
situation discussed in Figure 3.10 in that, as well as the pure locational
advantage, the transport cost advantage of firm
B
serves to further limit
the potential efficiency advantage of firm
A
. In contrast, in Figure 3.11b,
firm
B
is able to maintain a degree of monopoly power over its local
market, even though both its production costs and its transportation costs
are higher than those of firm
A
. Of the cases which can often be observed
empirically, in many ways this is the most extreme form of monopoly
power protection which can be afforded by geography, because in an aspa-
tial market firm
B
would automatically disappear. A common example
of this phenomenon is the case where firms
A
and
B
are both bakeries,
but firm
B
is a local bakery which manages to maintain a very small local
market area in the face of national competition from firm
A
, a national
bakery distributing through supermarkets. An even more extreme case of
spatial monopoly power is indicated by Figure 3.11c, in which firm
B
does
not dominate in its own immediate geographical vicinity, yet still manages
to maintain monopoly power over some more remote region, beyond the
reach of firm
A
.
In general, what we see is that the size of a firm's market area will be
larger the lower are its production costs and its transportation rates, and
the area over which a firm exhibits monopoly power is typically the area
in which it is located. While the last case depicted in Figure 3.11c is an
