Linear Market Areas
This chapter notes that if a firm starts as a spatial monopolist, it may not remain so for long if the local market is profitable. It determines where the new enterprises locate, and then considers pricing strategies and other games that duopolists or oligopolists play. The chapter explains the theory to explore commuter shopping, multipurpose, and multi-stop shopping behavior. The market area for a spatial monopolist is a function of its demand curve and the price-distance function. The radius of the market area varies when a store changes its prices or when transportation costs change for consumers. The spatial monopolist cannot control all market area changes. Market boundaries shrink if the firm charges a higher price, if travel costs increase, or if demand decreases. Market area boundaries expand when the firm lowers its price, when travel costs decrease, or when demand increases. Market area analysis is traced to a model developed by Harold Hotelling (1929).