and/or future) of 1 unit of that commodity. Thus, a specific
commodity might be No. 2 Red Winter Wheat available in Chicago no
later than September 1, 1975. Moreover, the price of No. 2 Red
Winter Wheat will vary as the location and time availability also
vary. Thus, in the strictest sense, commodity and price are precise
concepts, not readily amenable to empirical examination
unless—as in the case of wheat—an organized, central
market place exists.
A related
concept is that commodities are identified in terms of the utility
characteristics possessed by each. Thus, restaurants and kitchens
provide similar utility characteristics while differing greatly in
physical attributes. Consistent with this view is equality of
prices for physically dissimilar and otherwise distinct
commodities. For example, two used Chrysler sedans, identical
except that one has both air conditioning and greater mileage
recorded on the odometer, might sell for approximately the same
price. Moreover, these prices might also be the same even if one
was purchased in Chicago in May and the other purchased in New York
in June. In sum, the strict definition of a commodity is
theoretically unnecessary and empirically cumbersome. So long as
the commodities are highly similar in the utility characteristics
they provide, their prices will tend toward equality and they can
be considered as part of one market.
This
discussion also shows, however, that any attempt to delineate
geographic markets must presume agreement on the definition of the
product. Furthermore, it is generally preferable to deal with a
relatively short time span, both for the reason given earlier and
other reasons discussed later.
ECONOMIC THEORY OF MARKET AREAS
If raw
materials are geographically concentrated and firms tend to locate
close to materials sources, then the space dimension of markets
ceases to concern us. Specifically, with all producers located at a
single point, the industry or markets in question will be national
in scope. Interregional differences in prices will simply reflect
transport and similar costs. Of course, an industry organized as a
single plant monopolist will have interregional price differences
not attributable to transport costs; i.e., at least some price
discrimination is likely.
Other than
these two limiting cases, the simplest situation is one in which
there are two sellers surrounded by many buyers. This was the case
first examined some 50 years ago and, since that time, described as
the law of market areas. This law, as reformulated, states
that—for homogeneous goods produced and shipped over a
featureless plain—the market area of an individual firm will
be discrete, the exact shape depending on: (1) the firm's costs and
prices, with lower costs and prices meaning a larger territory for
the firm; and (2) transportation rates, with (discriminatory) low
rates and rates not proportional to distance shipped enlarging the
firm's market area. As the number of firms increased, the shapes of
the individual firm market areas would be altered;