Retailing Based Approaches

2.2.1.1. Economic Theories

The introduction of space into economics dates back to the works of classical economists.

Space, concretised as land, is considered one of the three factors of production together with capital and labour. The income obtained from the ownership and control of land gave rise to the development of land rent studies. In one of the first theorisations, Ricardo classified (agricultural) lands in terms of their productivity and claimed that rent is obtained through the differences of production when equal quantities of capital and labour are employed. Around the same period – the beginning of 1800’s – Von Thünen added the effect of transportation costs to Ricardo’s conceptualization and became able to develop a more comprehensive land rent theory, always based on agricultural lands.

Following the classical economic stream, in 1960, based on the works of Von Thünen, Alonso developed his bid-rent function theory as a model of urban land use distribution based on land rents. He considered urban land uses, their intensity, population distribution and employment as a function of distance to the most accessible place, i.e. to the city centre.

The theory suggests that the location of different activities depends upon competitive bidding for specific sites and firms make their biddings by considering their anticipated future returns and accessibility conditions to the sites. Consequently, the core becomes the focal point of all activities but not all activities could afford land values at that place. Arrangement of land use patterns tend to move towards an equilibrium where “output is optimal and the maximum efficiency of the city as a productive unit is realised” (Seyfried, 1963)⁴.

4 Although the work of Alonso and his followers are based on bids for lands in different uses, the author preferred to discuss the theory here because these theories have been particularly influential in the literature on the spatial structure of retailing.

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Figure 13: Hypothetical rent gradient in an unplanned shopping area (Source: Dawson, 1980)

One of the most interesting works, using bid rent curves, is that of Garner (1966). He classified business types according to their rent-paying abilities and adapted them into his spatial model. By doing so he was able to construct spatial models from different bid rent curves. According to Garner, regional, neighbourhood and community business types can be distinguished with the help of developed bid rent gradients. Although the two dimensional nature of the bid rent graphics are similar to concentric zone theory of Burgess, the economic basis and utilisation of finer data related to specific sectors make bid rent curves more concrete and realistic.

In the neo-classical economic theories, given enough initial assumption, it is demonstrated that supply and demand are held in equilibrium and the equilibrium is guaranteed by price mechanisms. Both the consumers and firms are considered under the concept of profit maximiser/cost minimiser “economic man” and they are thought to be fed by perfect information flows through the economic system. Technological developments leading to the elimination of fertility differences, together with the focus on urban lands where natural differences are minimised, contribute to the acceptance of an isotropic land assumption. To simplify the calculations, assumption of the availability of a single good in each sub-sector is accepted in most of the economic theories. As mentioned by Kivell and Shaw (1980:100), the spatial-economic approach would be much more complicated and even impracticable if these assumptions (isotropic space and single good) were relaxed. Despite these limitations, most of the location theories took their basis from economic considerations and related assumptions.

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Some of the general criticisms made to previous approaches are also valid for this land value theory. Although it offers a concrete background on the basis of land rent values, the theory neglects the external factors which cause irregularities to the distribution of land values and neglects the historical and sluggish process through which plots of land and uses actually change. The theory does not take into account urban planning regulations and unequally distributed road network, which all considerably affect land values. Even if land rents are considered to be a major parameter affecting the decision making process of firms, it should also be acknowledged that any combination of other parameters like the plot size, population characteristics and income distribution also have significant influences on the decision making process of the firms. A final criticism came from Kivell and Shaw who claimed that any study of the urban land market necessitates the enquiry into the political economy of urbanisation and the study of the investment market (1980:107).

2.2.1.2. Theory of the Firm

If land value theories are considered to be the products of classical economics, it is possible to place the theory of the firm into the neo-classical economic framework. The theory of the firm assumes that the main motivation of private economic activities is the maximisation of profits. Environmental complexities, like differences in population characteristics (e.g. density and spending power), and the reactions of other firms to these externalities make business environments difficult to conceptualise. It is also not possible to talk about a single firm motivation which is oriented towards profit maximisation. Strategies of the firms (retailers) vary according to their size, ownership pattern and goals. Additionally, many researchers point out that entrepreneurs also consider consumer variables and variations in demand before taking their location decisions (Claus, et al. 1972).

Agglomeration economies or the interdependency between firms, also play an important role in the theory of the firm. From the marketing point of view, the clustering tendency of firms is explained by Hotelling’s (1929) ‘ice-cream vendor’ situation or by Nelson’s (1958) ‘cumulative attraction theory’. Both theories suggest that firms functioning within the same merchandise category tend to cluster rather than to scatter in search of doing more business. In practice, it is demonstrated that this tendency based on initial advantage consideration neither necessarily produces more business nor creates a spatial organisation beneficial for consumers. Agglomeration based conceptualisations expanded knowledge about retailing by showing that firms produce rational decisions considering short term benefits and local situations. These decisions do not necessarily maximise their benefits and may produce negative social consequences, although not intended at the beginning.

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On the side of theory of the firm, critiques can be directed to the general assumptions limiting the understanding of the real world complexity. From time to time, firms’ diverse motivations lead them to benefit from agglomerations and sometimes from monopoly advantages, depending on the market structure and competing firms.