Market Areas and Systems of Cities

1

Market Areas and Systems of Cities

Chapter 3

2

Deriving a quantity-distance function

3

Demand cone

• Demand cone shows the quantity that a spatial monopolist sells to people who live at each distance from its location.

• Volume of a demand cone is the firm’s total revenue

4

Demand cone

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Market area of spatial monopolists

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Overlapping market area of two spatial monopolists

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Evolution of circular market areas into hexagonal market areas

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Honeycomb of long–run equilibrium market areas

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Threshold size market area

• The size of the market area that only allows a firm to earn normal profits: no excess profits.

• Each industry has a different size market area.

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Effect of threshold market area on spatial monopolist

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Overlapping market areas for three different industries

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Central places

• Smallest are order 1, and provide level 1 goods (basic needs) to its residents.

• Level 2 goods are provided by an order 2 city to its residents and to residents of smaller cities.

• All centers of higher order also provide goods of lower levels to the residents.

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Table 3-1. Functions available in by Central Places in Turkey. Note that all higher-order centers also offer all goods and services offered from the lower-order centers.

Zero-order center

First-order center

Second-order center

Third-order center

Fourth-order center

Fifth-order center

Sixth-order center

Number of places

35,812 650 504 58 11 4 1

Retail goods

Partial con-venience

Con-venience goods

Full shopping weekly market;gas stations;building materials

Specialized retail

Specialized shopping

Luxury shopping

Hospi-tality industry

Coffee shop

EateryHotel and restaurant

Luxury hotels and res-taurants

Edu-cation

Primary school

Middle school

Secondary schools

Two-year higher education institution

University

Major university research center

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Table 3-1. Functions available in by Central Places in Turkey. Note that all higher-order centers also offer all goods and services offered from the lower-order centers.

Zero-order center

First-order center

Second-order center

Third-order center

Fourth-order center

Fifth-order center

Sixth-order center

Religious centers

Mosque

Financial Services

Credit coop-erative

Bank Financial services

Special-ized financial services

Health and Medicine

Dispen-sary

Doctors; Medical services

Hospital, specialized medical services

Major hospital

Govern-ment

Post office; sub-district level government offices

Court house, district-level government offices; military offices; police station

Specialized courts; Province-level government offices

Regional offices of public works agencies

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Table 3-1. Functions available in by Central Places in Turkey. Note that all higher-order centers also offer all goods and services offered from the lower-order centers.

Zero-order center

First-order center

Second-order center

Third-order center

Fourth-order center

Fifth-order center

Sixth-order center

Legal servicesLegal services

Other services

Repair services; partial business services

Business services;design bureaus

Specialized business services

Entertainment Cinema Theater, concert hall

Transpor-tation

Bus and minibus terminal service

Inter-city bus terminal

Major bus and train terminal; airport

Major airportInternational airport

Manu-facturing

Artisan workshops

Limited manu-facturing

Manu-facturing

Headquarters of firms; major manu-facturing

Headquarters of major firms; diverse manu-facturing

Source: Adaptation of Mutlu 1988. Reprinted by permission from Blackwell Publishing.

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Instability of urban hierarchies

• Primarily due to changes in transport and communication systems

• Better roads and better communication systems in general cause large cities to grow, and smaller ones to die more quickly

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Studying competing centers

• Fetter’s law of market areas:

• Ignores retail agglomeration economies of larger cities

• Data expensive to gather.

tDptDp BBBAAA

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Reilly’s Law of Retail Gravitation

• No theoretical model• Two competing centers will attract

consumers from a third location in direct proportion to their respective sizes and in inverse proportion to the relative distances to the consumers’ locations

• Larger cities have wider markets• Cannot account for effect of lower prices in

smaller towns

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Rural cities and economic growth

• Small cities are not good catalysts for economic growth.

• Small cities are associated with smaller multipliers.

• Spending through small cities benefits the larger cities in that hierarchy

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Limitations of Central Place Theory

• Assumptions underlying urban hierarchies never conform perfectly to the model

• Central place theory explains pre-Industrial Revolution urban systems

• Applies mainly to shopping models

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Limitations of Central Place Theory

• Goods/ideas never flow up the hierarchy

• Theory lacks an equilibrium

• Ignores results of local trade restrictions and artificial barriers of doing business (linguistic, political boundaries)

• Ignores diseconomies of agglomeration that may cause people to want to move to lower-order places.

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Implementing Riley’s Law

• Calculate the market area boundaries. • Approximate the trade area population. • Calculate the trade area capture (TAC) to

determine the number of “customer equivalents” served by that industry.

• Determine the pull factor to see if the area is attracting people from outside its region or losing customers to another region.

• Forecast potential sales.

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Calculate the market area boundaries

• Distance from the smaller city to the trade area boundary:

Distance between the two cities

Population of the larger city1+

Population of the smaller city

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Table 3A–1. Population and Distance Data Needed to Implement Reilly’s Law

Cities PopulationDistance from Adamsville

Calculated Distance to Market Boundary

Calculated Distance to Market Boundary from Adamsville Using Reilly’s Law

Adamsville 4,161 0 -- --

Bethel 4,674 6+23=29 14.08 14.08

Catalina 4,864 36 17.30 17.30

DeWitt 3,553 22 10.57 11.43

Edgemont 5,215 25 11.09 11.09

Florence 2,990 30 13.76 16.24

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Map of Adamsville and surrounding minor civil divisions

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Table 3A–2. Calculating Total Trade Area Population

Minor civil division(Column 1)

Population(Column 2)

Estimated share of land area in market

for Adamsville (Column 3)

Total population in market area by minor civil division.

(Multiply Column 2 by Column 3.)

Adams Township 936 1% 9.36

Adamsville 4,161 100% 4,161

Benson Township 591 85% 502.35

Clyde Township 1,545 80% 1236

Calhoun 830 100% 830

Dawson Township 953 2% 19.06

Evans Township 3,654 45% 1,644.3

Floyd Township 5,583 87% 4,857.21

Gilbert Township 1,730 25% 432.5

Henry Township 1,766 10% 176.6

Total Trade Area Population 13,868.38

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Minor civil divisions within the trade area for Adamsville

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Trade Area Capture

• Number of customer equivalents =

income capitaper State

income capitaper County

population State

jindustry for esexpenditur state Totalicity in jindustry for sales retail Actual

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Pull Factor

• Pull factor > 1: area is serving customers from outside its nature trade area boundaries

• Pull factor = 1: area is only serving local customers

• Pull factor < 1: some customers going elsewhere to shop.

Trade Area Capture for industry jPull factor for industry j =

Trade area population

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Potential sales

• Note: per capita means divided by population.

income capitaper State

income capitaper County

jindustry for esexpenditur capitaper State

population area Trade sales Potential