The Pure Theory of Spatial Markets

Spatial phenomena which had been topics in theoretical Geography and Location Economics were seen as common objects in the new Regional Science of the 1950s. A point of crystallization was the notion of spatial markets going back to Wilhelm Launhardt (1886), who perceived them, as market (and supply) areas. Market areas are territories in which a given firm is the nearest and ceteris paribus the cheapest and hence exclusive supplier. This essay develops a systematic theory of spatial markets. It is thus an expository, drawing on previous work of T.C. Koopmans, Martin Beckmann and others of the “efficient allocation” school. The underlying theme is the familiar one of showing how prices (indexed by location) obtained in competitive markets can guide allocation of resources in space, and the deviations from this optimum that occur under various types of institutions. While thus backward looking, spatial markets can still provide an organizing framework to our contemporary interest in innovation. When buyer and seller are not in the same place, distance intervenes and transaction costs for transportation and/or communication arise, ordinary market theory no longer applies, e.g., “law of the single price” is violated. We are then, faced with spatial markets. This is actually among the oldest subjects treated in location theory. In Von Thünen’s “Isolated State” land use, production and sales to a metropolitan market are investigated as functions of distance (Von Thünen 1826). Wilhelm Launhardt’s location theory is grounded on market areas as sets of exclusive sales in a territory surrounding a firm or localized industry (Launhardt 1886). In this paper we offer a modern perspective of the theory of spatial markets in perfect competition. We exclude spatial price policies under monopoly, which have a rich literature of their own (Greenhut and Ohta 1975; Beckmann 1976). Market strategies of oligopolists aimed at defence or penetration of market areas, in which pricing is confounded with locational choice are also beyond the scope of this paper. The pure theory of spatial markets considers only those questions that exist when locations are given. In essence, it is location theory without locational choice.