Trade margins, transport cost thresholds and market areas: Municipal freight flows and urban hierarchy

Recent research has determined the existence of a border effect on trade flows within a country associated to agglomeration economies, the size of the spatial unit of reference, as well as to alternative measures of transport costs. Using a micro-database on road freight shipments within Spain for the period 2003-2007, we consistently decompose the total value of municipal freight flows into the extensive and intensive margins at the European Nuts-5 (municipal), 3 (provincial) and 2 (regional) levels and study the impeding effect of actual generalized transport costs (as opposed to proxies given by the standard measures of distance and travel time). Establishing the superiority of this generalized measure of transport costs, we confirm the accumulation of trade flows up to a transport cost value of 330 euros, and conclude that this high density is not explained by the existence of administrative limits (border effects) but to significant changes in the trade flows-transport costs relationship. While this high density of trade coincides with low level administrative borders (municipal and provincial) as there is a positive and significant effect associated to them on all trade decomposition, it is not significant, or even negative, at a larger regional level. To support this hypothesis, we identify significant thresholds in the trade flows-transport costs relationship that are calculated by way of the Chow test of structural change. These breakpoints allow us to split the sample and control for successive administrative borders in both the extensive and intensive margins. Relying on these thresholds we define relevant market areas corresponding to specific transport costs values that portrait a consistent urban hierarchy system of the largest Spanish cities within a radius of about 330 euros, thereby providing clear evidence of the predictions made by the central place theory.