Advances in Spatial and Network Economics – serie

This is a book about the simultaneous location, production and distri­ bution decisions of a firm entering a competitive market whose spatial nature is describable by a network in which the market either achieves an equilibrium or is equilibrium tending. As such, the problem is of clear theoretical and practical importance, for it is a rather general version of the problem faced by real firms every day in deciding where to locate. Further, the timeliness of this subject manifests itself in the growing excitement and interest found both in the research/academic communities and in the practitioner/private industry communities for more comprehensive approaches to competitive facility location analy­ sis and equilibrium modeling of networks. The desire both for new conceptual approaches yielding enhanced insights and for practical methodologies to capture these insights drives this interest. While nor­ mative, deterministic facility location modeling techniques currently provide valuable input into the location decision-making process, re­ searchers and practitioners alike have realized the vast and relatively untapped potential of more advanced location decision making tech­ niques. In this book, we develop what we believe represents a major new line of research in the field of competitive facility location analysis; namely, equilibrium facility location modeling. In particular, this book offers a number of innovations in the mathe­ matical analysis and computation of solutions to location models which we have pioneered and which are collected under a single cover for the first time.

This is a book about the simultaneous location, production and distri­ bution decisions of a firm entering a competitive market whose spatial nature is describable by a network in which the market either achieves an equilibrium or is equilibrium tending. As such, the problem is of clear theoretical and practical importance, for it is a rather general version of the problem faced by real firms every day in deciding where to locate. Further, the timeliness of this subject manifests itself in the growing excitement and interest found both in the research/academic communities and in the practitioner/private industry communities for more comprehensive approaches to competitive facility location analy­ sis and equilibrium modeling of networks. The desire both for new conceptual approaches yielding enhanced insights and for practical methodologies to capture these insights drives this interest. While nor­ mative, deterministic facility location modeling techniques currently provide valuable input into the location decision-making process, re­ searchers and practitioners alike have realized the vast and relatively untapped potential of more advanced location decision making tech­ niques. In this book, we develop what we believe represents a major new line of research in the field of competitive facility location analysis; namely, equilibrium facility location modeling. In particular, this book offers a number of innovations in the mathe­ matical analysis and computation of solutions to location models which we have pioneered and which are collected under a single cover for the first time.

The common theme in the essays of this book is the emergence and sur­ vival of spatial structures. How are economic structures created in an otherwise homogeneous environment? The answer must be sought through an analysis of economic forces that operate in the two dimensional contin­ uum of space. Ultimately these forces emanate from the fundamental fact that spatial concentration is needed to reap increasing returns to scale. i. e. to gather the fruits of the division of labour. Adam Smith's dictum: "The division of labour is limited by the size of the market" poses a fundamental question to spatial economic analysis: just how do markets operate when extended over distances? Although these essays were written at different times they all relate to the problem of economic structures generated in spatial markets. They approach the phenomena of spatial order from different angles, but it is hoped in a connected and logically consistent way. We thank the editors and publishers of the Annals of Regional Science for permission to reprint parts of the articles "On the Shape and Size of Market Areas" and "Population Growth and Dispersal" to be published this year. It is our pleasure to thank Mrs. I. Strohlein for drawing several figures and Dr. H. Mittermeier for compiling the index. Last not least we are grateful to Mrs. B. Schwarzwalder for her patient job of typing and retyping this manuscript.

1. 1 A Brief History of U. S. Commercial Aviation Regulation and Deregulation The U. S. commercial aviation industry was regulated by the government for a period of 40 years, beginning in 1938 with. the passing of the Federal Aviation Act, and ending in October 1978 when President Carter signed into law the Airline Deregulation Act (ADA). There were 16 airlines in existence when the Federal Aviation Act was passed in 1938 (the so-called 'trunk lines'). The Act established the Civil Aeronautics Authority (CAA) as the industry's regulatory body. The Act was passed principally because it was felt that the free market, if allowed to continue unregulated for much longer, would put many of these firms into bankruptcy. It is possible therefore to view the CAA of 1938 (re-organized into the Civil Aeronautics Board (CAB) in 1940) as a response to a potential market failure at the time. In the 1930s, few air traffic markets could have efficiently"supported more than one airline operating in the market [Panzar (1980)]. Competition among the carriers was cut-throat, and it was felt that the near bankruptcy of the airlines in the period was caused principally by the competitive bidding system used by the Post Office in allotting airmail subsidies [Keeler (1972), Caves (1962)].

Today, telecommunication systems are expanding and evolving at a remarkable rate, with the aid of fiber optics, satellites and comput­ erized switchboard systems. Airline systems are providing faster and more efficient networks for world-wide human transportation. Com­ puters are now generally accessible to virtually all industries and many households. But perhaps the most important factor is that education systems are expanding the knowledge base for city populations, thus resulting in increased efficiency in the use of computers, telecommuni­ cations and rapid transportation systems. The revolutionary age of logistical networks is upon lIS. Logistical networks are those systems which facilitate the movement of knowl­ edge, commodities, money, and people in association with thE; produc­ tion or consumption of goods and services. Logistical networks form a set of important infrastructure which serve as hard and soft means to sustain all kinds of movement, transactions and diffusion within and between global networks of cities. Major structural changes in the re­ gional and urban economy, culture and institutions are triggered by slow but steady changes in global logistical systems.

Network economics is a new, rapidly developing field. In this volume theoretical and empirical contributions are collected, each deals with different aspects of the network economy. The book assesses networks as a complement to pure market relations and studies innovation networks and strategic alliances among innovative corporations. Product differentiation and specialization in reciprocal networks are emphasised as a strategy of sustainable development. The book presents econometric methods of barrier and network analysis, including communication and trade patterns.

Book titles, because they are compromises between concision and precision, provide but an approximate description of real content. For this book an al­ ternative and more comprehensive title would be: An investigation of spatial arbitrage as an introduction to the theory of commodity markets: trade and space-time patterns of price fluctuations. In this title, both the specificities and the limitations of our approach are emphasized. Firstly, our approach con­ centrates on the basic mechanisms of spatial arbitrage, leaving aside a number of accessory facets of international trade such as the impact of quotas or of ex­ change rates. Secondly, for the sake of simplicity we restrict ourselves to single commodity markets; the interrelationship of different goods on multi-commodity markets are only occasionally mentioned. The previous restrictions, however drastic they may at first appear delimit and define what can be considered as the core of the process of trade and of spatial transactions. Having thus simplified the object of our study, we are able to tackle the problem in a systematic way and to model spatial differentials along with their relationships to the volume of trade both in eqUilibrium and in non-equilibrium situations. As far as the subtitle of the book is concerned, we shall postpone the discussion of what is meant by the expression "analytical economics" until the concluding chapter.