Geography Reference
In-Depth Information
exception and may only be a hypothetical possibility, it serves to highlight
that fact that the distribution of spatial market areas is a highly complex
phenomenon. Market areas are determined by the interplay of produc-
tion costs, transportation costs and geographical location of consumers
and competing producers. Obviously in the cases discussed here we have
depicted a spatial market in its simplest form, namely a one-dimensional
linear market O- L . If the market is defined in two-dimensional terms then
the spatial areas become more complex. However, it is quite straightfor-
ward to use the one-dimensional model in order to provide some general
rules governing the extent to which distance costs provide a firm with
spatial monopoly power. These can be summarized as follows:
The higher are the transport rate values t a and t b , the greater will be
the monopoly power of the firm, and the smaller will be the reduc-
tion in the firm's own market area resulting from any marginal
increase in the firm's own price, or from any marginal reduction in
a competitor firm's price.
The further apart are the locations of competing firms, the greater
will be the monopoly power of the firm, and the smaller will be
the fall in the firm's own market area resulting from any marginal
increase in the firm's own price, or from any marginal reduction in
a competitor firm's price.
Therefore, firms which are located at a great distance from each other, and
which face significant transport costs, will consequently tend to exhibit
significant local spatial monopoly power. That being the case, it might be
expected that firms will therefore generally move away from each other in
order to maintain their local monopoly power. However, observation sug-
gests this is not always the case, and that while there are many situations
in which firms locate away from each other, there are also many situations
in which firms actually locate together. In order to distinguish between
these different situations we need to consider the relationship between the
spatial market area and the competition between the firms.
3.5
THE HOTELLING MODEL OF SPATIAL
COMPETITION
The fact that geography and space confer local monopoly power on
a firm provides an incentive for firms to use location behaviour as an
explicit competitive weapon for acquiring greater monopoly power. In
competitive environments characterized by oligopoly, the interdepend-
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