A GENERAL SPATIAL EQUILIBRIUM MODEL

FOR MARKET AREA SIZE ANALYSES

IN MA-NUFACTURING AND SERVICE INDUSTRIES

In this paper a general spatial market equilibrium model is presented. The model builds on the

Location Theory's standard transport and production costs trade-off, which has been recogni-

zed at least since Smith (1776). This trade-off problem was further explicitly elaborated by

Weber (1909), and essentially coached in his, today well-known, triangles. The Weber prob-

lem has formed much of the basis for spatial models put forward in the 20th century. Many

models have been extended by additional explanatory variables, among which some measure

of the density of demand seems to be the one of most common.

The present model is primarily developed for analyzing the market area size of manufacturing

plants and service providers. The model is coached in algebraic terms, and displays three

distinguishing characteristics.

First, the model includes transport costs, the degree of economies-of-scale in the production

and density of demand as explanatory variables. By assuming a particular cost function it is

possible to derive, and add a forth explanatory variable to the model ? the unit value (that is

the value per ton or m3 etc.) of the commodity in question.

Second, market area size is assumed to vary positively with the unit value of the commodity

and the degree of economies-of-scale in the production, but to vary negatively with transport

costs and density of demand. This makes it possible to arrange the four explanatory variables

in an explicit formula in terms of two ratios. Namely, the transport costs relative to the unit

value of the commodity, and the density of demand relative to the degree of economies-of-

scale in production. Both these ratios constitute concepts that make intuitive sense in a

spatial-economic context.

Third, the model is formulated in a traditional Location Theory terminology, which is encoun-

tered mainly in manufacturing industries. The model, however, it may be stressed, is equally

applicable to service industries.

Finally, it may also be mentioned that the model has been used for empirical testing in Europe

and in the United States. The results of these empirical studies are encouraging, and have been

reported in Wall (2000a, 2000b).