Market areas and systems of cities
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Market Areas and Systems of Cities. Chapter 3. Deriving a quantity-distance function. 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. Demand cone.

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Market Areas and Systems of Cities

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Market Areas and Systems of Cities

Chapter 3


Deriving a quantity-distance function


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


Demand cone


Market area of spatial monopolists


Overlapping market area of two spatial monopolists


Evolution of circular market areas into hexagonal market areas


Honeycomb of long–run equilibrium market areas


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.


Effect of threshold market area on spatial monopolist


Overlapping market areas for three different industries


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.





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


Studying competing centers

  • Fetter’s law of market areas:

  • Ignores retail agglomeration economies of larger cities

  • Data expensive to gather.


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


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


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


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.


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.


Calculate the market area boundaries

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



Map of Adamsville and surrounding minor civil divisions



Minor civil divisions within the trade area for Adamsville


Trade Area Capture

  • Number of customer equivalents =


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.


Potential sales

  • Note: per capita means divided by population.


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