Theoretical Market Areas Under Euclidean Distance

Abstract

Though already initiated by Rau in 1841, the economic theory of the shape of two-dimensional market areas has long remained concerned with a representation of transportation costs as linear in distance. In the general gravity model, to which the theory also applies, this corresponds to a decreasing exponential function of distance deterrence. Other transportation cost and distance deterrence functions also appear in the literature, however. They have not always been considered from the viewpoint of the shape of the market areas they generate, and their disparity asks the question whether other types of functions would not be worth being investigated. There is thus a need for a general theory of market areas: the present work aims at filling this gap, in the case of a duopoly competing inside the Euclidean plane endowed with Euclidean distance.