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Spatial Structure in the Retail Trade: A Study in Product Differentiation with Increasing Returns

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  • Geoffrey Heal

Abstract

This article develops a model to analyze the implications of economies of scale in transportation for the spatial distribution of retail outlets and for the structure and pricing of public transportation systems. Consumers (or workers) are located around the circumference of a circle with a single producer (or employer) at the center. Consumers may buy directly from the center (workers may drive directly to the center), or they may buy from shops on the circumference which have bought in bulk from the center (workers may drive to stations on the circumference and commute by public transportation). The article examines the socially optimal pattern of outlets, the pricing policy which supports this and the effects of alternative pricing policies, and the patterns of outlets resulting from various forms of competition. Among the results derived, it is shown that the socially optimal pattern cannot be sustained by nondiscriminatory pricing that covers average costs, and that attempts to cover average costs may lead to large distortions. In addition, without price discrimination, competition usually leads to an excessive number of outlets if the market is large and to an insufficient number if the market is small.

Suggested Citation

  • Geoffrey Heal, 1980. "Spatial Structure in the Retail Trade: A Study in Product Differentiation with Increasing Returns," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 565-583, Autumn.
    • Handle: RePEc:rje:bellje:v:11:y:1980:i:autumn:p:565-583
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    Cited by:

    1. Bouckaert, Jan, 2000. "Monopolistic competition with a mail order business," Economics Letters, Elsevier, vol. 66(3), pages 303-310, March.
    2. Evelyn O. Smith & Jeffrey D. Shulman, 2022. "Product diversion by vertically differentiated firms," Production and Operations Management, Production and Operations Management Society, vol. 31(5), pages 1928-1939, May.
    3. Kenn Ariga & Kenji Matsui, 2003. "Mismeasurement of the CPI," NBER Chapters, in: Structural Impediments to Growth in Japan, pages 89-154, National Bureau of Economic Research, Inc.
    4. Gremm, Cornelia & Bälz, David & Corbo, Chris & Mitusch, Kay, 2019. "Intermodal competition between intercity buses and trains: A theoretical model," Working Paper Series in Economics 135, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    5. Jacek Cukrowski, 1998. "Information-processing, technological progress and regional retail networks dynamics," ERSA conference papers ersa98p71, European Regional Science Association.
    6. Walter Y. Oi, 1992. "Productivity in the Distributive Trades: The Shopper and the Economies of Massed Reserves," NBER Chapters, in: Output Measurement in the Service Sectors, pages 161-193, National Bureau of Economic Research, Inc.
    7. Bouckaert, J.M.C., 1995. "Monopolistic competition with a mail order business," Other publications TiSEM 00c7f479-a935-4b7d-8f70-5, Tilburg University, School of Economics and Management.
    8. Shi, Hui, 2012. "The efficiency of government promotion of inbound tourism: The case of Australia," Economic Modelling, Elsevier, vol. 29(6), pages 2711-2718.
    9. Madden Paul & Pezzino Mario, 2011. "Oligopoly on a Salop Circle with Centre," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-30, January.
    10. Norbert Schulz & Konrad Stahl, 1985. "Localisation des oligopoles et marchés du travail locaux," Revue Économique, Programme National Persée, vol. 36(1), pages 103-134.
    11. Ayd{i}n Alptekinou{g}lu & Charles J. Corbett, 2008. "Mass Customization vs. Mass Production: Variety and Price Competition," Manufacturing & Service Operations Management, INFORMS, vol. 10(2), pages 204-217, August.
    12. Kleer, Robin & Piller, Frank T., 2019. "Local manufacturing and structural shifts in competition: Market dynamics of additive manufacturing," International Journal of Production Economics, Elsevier, vol. 216(C), pages 23-34.
    13. Jacek Cukrowski, 2002. "Privatizing a service sector: where to start?," Prague Economic Papers, Prague University of Economics and Business, vol. 2002(3), pages 269-279.
    14. Yuetao Gao, 2018. "On the Use of Overt Anti-Counterfeiting Technologies," Marketing Science, INFORMS, vol. 37(3), pages 403-424, May.
    15. Aiura, Hiroshi & Sato, Yasuhiro, 2008. "Welfare properties of spatial competition with location-dependent costs," Regional Science and Urban Economics, Elsevier, vol. 38(1), pages 32-48, January.
    16. Sridhar Balasubramanian, 1998. "Mail versus Mall: A Strategic Analysis of Competition between Direct Marketers and Conventional Retailers," Marketing Science, INFORMS, vol. 17(3), pages 181-195.
    17. Ben Shiller & Joel Waldfogel, 2009. "Music for a Song: An Empirical Look at Uniform Song Pricing and its Alternatives," NBER Working Papers 15390, National Bureau of Economic Research, Inc.
    18. David Flath, 2003. "Regulation, Distribution Efficiency, and Retail Density," NBER Working Papers 9450, National Bureau of Economic Research, Inc.
    19. Cukrowski, Jacek & Fischer, Manfred M., 2002. "Information-processing, technological progress, and retail markets dynamics," Information Economics and Policy, Elsevier, vol. 14(1), pages 1-20, March.
    20. Amar Sapra & Jiri Chod & Aydiota n Alptekinou{g}lu & Li Chen & A. Gürhan Kök & Victor Martínez-de-Albéniz, 2004. "The MSOM Society Student Paper Competition: Extended Abstracts of 2003 Winners," Manufacturing & Service Operations Management, INFORMS, vol. 6(1), pages 92-112.

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