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Spatial Economics Foundation

The theoretical bedrock underlying the Convenience Theorem

What is Spatial Economics?

Spatial economics is the study of how economic activity is distributed across geographic space and how location affects economic decisions. This field examines why businesses cluster in certain areas, how transportation costs influence market behavior, and how distance creates both opportunities and barriers in economic exchange.

Key Concepts

  • Location Theory: How businesses choose optimal locations based on costs, accessibility, and market proximity
  • Spatial Competition: How firms compete when consumers face different costs to reach each competitor
  • Transportation Costs: The role of distance, time, and effort in economic decision-making
  • Market Areas: Geographic boundaries where one supplier has competitive advantage over others

Foundation for Convenience Pricing

Spatial economics provides the theoretical foundation for understanding convenience premiums. When consumers face different costs to reach alternative suppliers—whether in time, distance, or effort—they effectively operate in spatially differentiated markets. The Convenience Theorem builds on this foundation by providing a quantitative framework for pricing these spatial advantages.

From Hotelling to Convenience Theory

Harold Hotelling's seminal 1929 model demonstrated that spatial differentiation allows firms to charge premium prices even in competitive markets. His linear city model showed that when consumers face transportation costs, firms can maintain pricing power based on their location advantages. The Convenience Theorem extends this insight by:

  • Quantifying multiple dimensions of spatial cost (distance, time, effort, risk)
  • Incorporating consumer psychology and hard premium limits
  • Providing industry-specific calibration for different market contexts

Modern Applications

Contemporary spatial economics research has evolved to include behavioral factors, technology impacts, and service differentiation—all elements that inform the Convenience Theorem's sophisticated approach to pricing spatial advantages in modern markets.

Academic Sources & Credits

  1. Hotelling, H. (1929). "Stability in Competition." The Economic Journal, 39(153), 41-57. [Foundational spatial competition model]
  2. Lösch, A. (1954). The Economics of Location. New Haven: Yale University Press. [Comprehensive location theory framework]
  3. Eaton, B. C., & Lipsey, R. G. (1982). "An Economic Theory of Central Places." The Economic Journal, 92(365), 56-72. [Modern spatial competition theory]
  4. Salop, S. C. (1979). "Monopolistic Competition with Outside Goods." The Bell Journal of Economics, 10(1), 141-156. [Circular city model extending Hotelling]
  5. Anderson, S. P., De Palma, A., & Thisse, J. F. (1992). Discrete Choice Theory of Product Differentiation. MIT Press. [Comprehensive treatment of spatial differentiation]
  6. Greenhut, M. L., Norman, G., & Hung, C. S. (1987). The Economics of Imperfect Competition: A Spatial Approach. Cambridge University Press. [Applied spatial competition analysis]

Note: The Convenience Theorem represents an original contribution by Dillan Mori and Michael Chase, building upon these established spatial economics foundations to create a practical framework for convenience pricing in modern markets.