Jean-Paul Rodrigue (2017), New York:
Routledge, 440 pages.
Author: Dr. Jean-Paul Rodrigue
Each economic activity has a location, but the various demands
(raw materials, labor, parts, services, etc.) and flows each
also have a spatial dimension called a market area.
A market area is the surface over which a demand or supply
offered at a specific location is expressed. For a factory it includes
the areas to where its products are shipped; for a retail store
it is the tributary area from which it draws its customers.
Transportation is particularly important in market area analysis
because it impacts on the location of the activities as well as their
accessibility. The size of a market area is a function of its
threshold and range:
In the case of a single market area its shape in an isotropic plain
is a simple concentric circle having the market range as radius. Since
the purpose of commercial activities is to service all the available
demand, when possible, and that the range of many activities is limited,
more than one location is required to service an area. For such a purpose,
a hexagonal-shaped structure of market areas represents the
optimal market shape under a condition
of isotropy. This shape can be modified by
non-isotropic conditions mainly
related to variations in density and accessibility.
2. Economic Definition of a Market Area
A market depends on the relationships
between supply and demand. It acts as a price fixing mechanism for
goods and services. Demand is the quantity of a good or service
that consumers are willing to buy at a given price. It is high if the
price of a commodity is low, while in the opposite situation - a high
price - demand would be low. Outside market price, demand can generally
be influenced by the following factors:
- Market threshold. Minimum demand necessary to support
an economic activity such as a service. Since each demand has a
distinct location, a threshold has a direct spatial dimension. The
size of a market has a direct relationship
with its threshold.
- Market range. The maximum distance each unit of demand
is willing to travel to reach a service or the maximum distance
a product can be shipped to a customer. The range is a function
of transport costs, time or convenience in view of intervening opportunities.
To be profitable, a market
must have a range higher than its threshold.
Supply is the amount of goods or services that firms or individuals
are able to produce taking account of a selling price. Outside price,
supply can generally be influenced by the following factors:
- Utility. While goods and services that are necessities
(such as food) do not see much fluctuation in the demand, the demand
for items deemed of lesser utility (even frivolous) would vary according
to income and economic cycles.
- Income level. Income, especially disposable income, is
directly proportional with consumption. A population with a high
income level has much more purchasing power than a population with
a low income.
- Inflation. Involves an increase in the money supply in
relation to the availability of assets, commodities, goods and services.
Although it directly influences prices, inflation
is outside the supply-demand relationship and decreases the purchasing
power, if wages are not increased accordingly.
- Taxation. Sale and value added taxes can have an inhibiting
effect on sales of goods and services as they add to the production
costs and claim a share of consumer's income.
- Savings. The quantity of capital available in savings
can provide a potential to acquire consumption goods. Also, people
may restrain from consuming if saving is a priority, namely in periods
of economic hardship. The wide availability of credit in a fiat
currency system has considerably skewed the relationships between
savings and consumption as it promotes current consumption levels,
but at the expense of future consumption.
According to the market principle, supply and demand are determined
by the price, which is an equilibrium between both. It is often called
equilibrium price or market price. This price is a compromise
between the desire of firms to sell their goods and services at the
highest price possible and the desire of consumers to buy goods and
services at the lowest possible price.
For many economists, the market is a point where goods and services
are exchanged and does not have a specific location, since it is simply
an abstraction of the relationships between supply and demand. It is
important to underline that since most of the time consumers
must move in order to acquire a good or receive a service. The producer must
also ship a commodity to a location where the consumer can buy it;
a store or a residence (in the case of online shopping).
The concept of distance must thus be considered concomitantly with the
concept of market. In those conditions, the real price includes the
market price plus the transport price from the market to the
location of final consumption.
3. Competition over Market Areas
Competition involves similar activities trying to attract customers.
Although the core foundation of competition for a comparable good or
service is price, there are several spatial strategies
that impact the price element. The two most common are:
- Profits. Even if the sales of a product are limited,
if profits are high an activity providing goods or services may
be satisfied with this situation. This is particularly the case
for luxury goods. If profits are low, an activity can cease, thus
lowering the supply.
- Competition. Competition is one of the most important
mechanisms for establishing prices. Where competition is absent
(an oligopoly), or where there is too much (over-competition), prices
artificially influence supply and demand.
Developing operational market area models has been the object
of numerous approaches. Initial work undertaken in the first half of
the 20th century focused on simple market competition (Hotelling's
law), which was the foundation of market area analysis by considering factors such
as retail location and distance decay. Later, factors such as market
size were taken into consideration (Reilly's
law), permitting to build complex market area representations. Since market areas
are often non-monopolistic, this factor was included with market areas
becoming ranges of probabilities that customers will attend specific
locations (Huff's law). Although market areas
are particularly relevant for retail analysis, the methodology also
applies to time dependent activities, such as
since distribution centers are located to service specific national or
4. Geographic Information Systems and Market Areas Analysis
Geographic Information Systems (GIS) have become fundamental tools to evaluate market areas, especially
in retailing. With basic data, such as a list of customers and their
addresses (or ZIP codes) it is relatively simple to evaluate market areas
with a reasonable level of accuracy, a task that would have been much
more complex beforehand. With GIS, market area analysis left the realm
of abstraction to become a practical tool used by retailers and
service providers in complex real-world situations. In the spatial
representation of a GIS, the market area is a polygon which can be measured
and used to perform operations such as intersection (zones of spatial
competition) or union (area serviced). Among the
major methods a GIS can be used
to evaluate market areas are:
- Market coverage. Activities offering the same service
will occupy locations in view to offer goods or services to the
whole area. This aspect is well explained by the
central place theory and applies
well for sectors where spatial market saturation is a growth strategy
(fast food, coffee shops, etc.). The range of each location will
be a function of customer density, transport costs and the location
of other competitors.
- Range expansion. Existing locations try to expand their
ranges in order to attract more customers. Economies of scale resulting
in larger retail activities
are a trend in that direction, namely the emergence of shopping
malls. Taken individually, each store would have a limited range.
However, as a group they tend to attract additional customers from
wider ranges for many reasons. First, a complementarity of goods
or services is offered. A customer would thus find it convenient
to be able to buy clothes, shoes and personal care products at the
same location. Second, a diversity of the same goods or services
is offered (more choice) even if they compete between one other. Third, other
related amenities are provided such as safety, food, indoor walking
space, entertainment and also parking space.
- Concentric circles. The simplest method since it assumes
an isotropic effect of distance in all directions. The radius represents
the maximum distance a customer is willing to travel. It is useful
to have a rough overview of the situation when limited information
- Share by polygon. When data is available at the zonal
level, such as the ZIP code the market area can be expressed as
a share of the market for each zone.
- Star map. Composed of straight lines between each customer
and locations. It is an indication of the extent and the shape of
the market area and particularly relevant for distribution systems
where relationships between distribution centers and their customers
- Spatial smoothing. A trend surface based on the location
of actual customers. The higher the density of customers (the importance
of each customer can be weighted), the higher the membership to
a market area.
- Transport distance. Particularly useful for retailing
or any activity that depend upon consumer accessibility or timed
deliveries. A measure of transport distance, often driving time
in minutes, is calculated on road segments radiating from the facility
- Manual polygon. Based on the local knowledge, common
sense and judgment. It may implicitly consider other methods.