Spatial Price Theory

Spatial price theory
■ Competitive general equilibrium model determines a

pricing system.
■ It implies that the same good traded in different
places is treated as a different product.
■ Therefore, location decisions are equivalent to
choosing to produce or consume a different product.
■ This discards the need for an economic theory in a
spatial context.
What happens when space is incorporated into
the analysis?
■ Even in eq. The prices of homogeneous goods
will not be identical.
■ Prices vary depending on location.
Two of the problems for the spatial determination
of prices refer to:
■ Establish equilibrium conditions;
■ The discrimination.
■ Traditional price theory: Price and

production decisions in a spaceless
economy.
■ What about equilibrium conditions?
Spatial equilibrium: Based on the idea that
the price of a homogeneous good varies
throughout space due to the presence of
transportation costs.
The conditions of spatial equilibrium of
prices require:
■ That interregional trade flows are
compensated in the system.
■ That the differences in prices in the
different markets, once the trade has
taken place, are equal to or less than the
unit costs of transportation between the
markets.
It is a problem that has to do with the most
efficient way to transport goods between
different points.
It is known as the Hitchcock, Koopmans,
Dantzig transportation problem:
Solution to this problem Linear programming
technique
■ An objective function: minimize transportation
costs and optimize the flow of goods between
pairs of regions.
Assumptions:
■ Regional system in which regions produce and
demand a homogeneous good.
■ Each region represents a market located at a
fixed point spatially separated from the others.
■ In interregional trade there are only
transportation costs per unit of good.
■ The unit transportation cost is known and does
not depend on the volume being transported.
■ Regional supply and demand are given.
■ Total demand is equal to or less than total
supply
■ Producers behave competitively.
■ Consumers are indifferent regarding the
different sources of supply.
The set of transactions that minimizes total
transportation costs must be determined. F.
EITHER.
■ This approach refers to a single asset
but can be extended to the case of
many assets.
■ It is a market model
separated by space and is a special
case of the set of situations in which
producers and consumers are dispersed
in the
space.
It is useful to illustrate general
principles:
■ Trade flows reduce interregional price
differences.
■ Trade flows improve spatial allocation.
■ Transportation costs set a limit to price
equalization.
Space monopoly and price
determination
Discrimination is another problem for the
spatial determination of prices.
In the spatial theory of prices, a basic
principle is that a spatial monopolist who
maximizes profits discriminates against
buyers closer to him and in favor of those
more distant.
■ Spatial price discrimination is possible due to the
variation in transportation costs depending on
the location of buyers.
Assumptions:
■ Monopolist, 1 homogeneous good
■ Uniform demand distribution
■ Identical demands
■ Ctos. of transportation per unit of distance and
unit of good = 1
■ Ct. marginal cte. (c) non-negative c ≥0
■ Monopolist maximizes profits when: IMg =
CMg
■ How do prices vary with respect to distance?
If the distance is large enough (large market
areas) a profit-maximizing monopolist will
always discriminate against nearby buyers
unless there are legal or institutional reasons.
Even without the existence of monopoly power,
sellers can practice price discrimination if the
market areas are very large.
An oligopoly may exist; producers may also
adopt price discrimination policies.
The opportunities are greater if there are fewer
competitors.
Free entry
Price determination model in space under
conditions of free entry.
■ Producers maximize profit.
■ homogeneous product
■ Difference in the product given by the distance
■ Uniform distribution of demand.
■ Identical demands
■ Plane without borders and without physical
accidents.
■ Extraordinary profits are eliminated with the
incorporation of new companies.
■ Entry continues until the normal equilibrium of

monopolistic competition is reached (tangency
of the average revenue and average cost
curves).

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Spatial Price Theory

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Spatial price theory

■ Competitive general equilibrium model determines a

■ Traditional price theory: Price and

■ Entry continues until the normal equilibrium of

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