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Hel Peby (25413042) Spatial Economics (PL-5103) Assignment

1. What role can location play in competitive strategy of firms, and how are location and price strategies interrelated? The firms do not compete only in price, but also in non-price competition. Interdependence between firms in determination of output qualities and market share is a result of locational consideration. In case where both production cost and transport rate are identical, location have an important role in competition of market share. This phenomena can be explained by Hotelling location game. Moving location can increase the market share and reduce the competitors one. In game theory, any situation in which neither firms has any incentive to change its behavior is known as a Nash Equilibrium. The locational result in which firms are located at centre of the market and they no longer continue to move. Another interdependence experience in between price and locational decision. Spatial market are not divided up according to deliver prices which vary with location. On the other hand, where delivered prices are invariant with respect to distance within a given market area, this implies that the marginal profitability of each delivery will be different according to the location of the consumer. This is because the transport cost of outputs must be absorbed by the firm, thereby reducing the net marginal profit from sales as delivery distance increases.

2. What role do logistics costs play in determining location behavior? In particular, total logistics costs in fact have more significant effect than transport cost alone because each inventory purchasing and carrying cost components can be shown to be distance functions. The explanation of that is moving goods to other palace needs time and as a consequence, firms must hold inventories of good to maintain supplies. All of that incur cost, therefore firm must consider the relationship between cost of moving goods and cost of not moving. In conclusion, logistics-cost approach to location behavior affect the high value-adding activities tent to be both more market-oriented and much less responsive to inter-regional wages differences.

3. What insight are provided for industrial location analysis by behavior theories of firm behavior? Behavior theories assume that information is very limited, for example, imperfect information about the inherent heterogeneity of land, real estate and local economic environment. In this condition, location behavior of the modern firm is not only base on profit maximization but also other objective because corporate decision are result of many individual decisions made by complex hierarchy of people witch have each particular business objective. The reason is performance of employees is measured in different indicator. For example, directors performance may be evaluated primarily by firms market share, the sales manager; sales growth, production manager; inventory throughput efficiency, and other position with their own performance measure indicator. So, given that conflicting goal and imperfect information regarding different spatial cost and revenue curves, the actual location behavior of firm will depend on which particular dominant objective of the firm.

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