Spatial Structure in the Retail Trade: A Study in Product Differentiation with Increasing Returns

This article develops a model to analyze the implications of economies of scale in transportation for the spatial distribution of retail outlets and for the structure and pricing of public transportation systems. Consumers (or workers) are located around the circumference of a circle with a single producer (or employer) at the center. Consumers may buy directly from the center (workers may drive directly to the center), or they may buy from shops on the circumference which have bought in bulk from the center (workers may drive to stations on the circumference and commute by public transportation). The article examines the socially optimal pattern of outlets, the pricing policy which supports this and the effects of alternative pricing policies, and the patterns of outlets resulting from various forms of competition. Among the results derived, it is shown that the socially optimal pattern cannot be sustained by nondiscriminatory pricing that covers average costs, and that attempts to cover average costs may lead to large distortions. In addition, without price discrimination, competition usually leads to an excessive number of outlets if the market is large and to an insufficient number if the market is small.