Staking Out the Firm’s Market
A firm typically has a market area: a geographic area wherein the firm dominates and does much of its sales. Within its market area, a firm is able to affect the price received to the extent that the effective prices from other suppliers make them uncompetitive. What determines the size and shape of a market area? How might the presence of a market area affect firm behavior? Model 8A considers market area when a firm and its competitor sell at the same f.o.b. price. Model 8B looks at market area when firms have different f.o.b. prices. In 8C, the firm sets a price that maximizes its profit assuming that competitors do not react. Model 8D studies how the firm’s market area boundary adjusts to capacity constraints. Model 8E shows how the firm’s market area boundary varies when it sells a different but perfectly substitutable good. Models 8F, 8G, and 8H introduce differences among consumers as well as imperfectly substitutable goods. Chapter 1 argues that there are important linkages between prices and localization. I illustrated that idea in Model 2D wherein price and localization were joint outcomes for the monopolist. However, since that chapter, the models in this book have been concerned only with how prices affect localization. This chapter considers how a firm sets its price in response to the proximity of competitors and the prices they set. This chapter explores how, as a consequence, localization and price are jointly determined.