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THE OPTIMAL MARKET AREA FOR A SINGLE STORE REGION: NEW WINE IN AN OLD BOTTLE
Author(s) -
Lentnek Barry,
Harwitz Mitchell,
Narula Subhash C.
Publication year - 1988
Publication title -
papers in regional science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.937
H-Index - 64
eISSN - 1435-5957
pISSN - 1056-8190
DOI - 10.1111/j.1435-5597.1988.tb01164.x
Subject(s) - tariff , wine , welfare , range (aeronautics) , marginal cost , distribution (mathematics) , function (biology) , business , microeconomics , economics , mathematics , international trade , engineering , market economy , mathematical analysis , physics , evolutionary biology , optics , biology , aerospace engineering
In this paper we present a new solution to the old problem of determining the optimal market size for a single store selling a single good, We maximize average welfare by minimizing the costs of retailing a good to the average customer who pays both to transport and to store the good at home. We show that average welfare is maximized by a two‐part tariff in which the good is priced at marginal cost and there is a lee that covers fized costs. We demonstrate that regional distribution cost per family is a well‐behaved, u‐shaped cost function of the size of the region in every case where a store is feasible The radius at which this quantity is a minimum defines the optimal range of the good if it is less than or equal to the outer range.