Retail Rents and Market Areas

Abstract

A model of the equilibrium spatial size of a market, in which shop rents are determined endogenously, is constructed on the lines of previous studies of market areas. Two cases are considered: the shop rents in the first model are determined by competition with the housing sector, whereas in the second the licensing of sites for retail use by a planning authority landlord which has as its aim the maximization of its receipts from all shops in the town is modelled. The models developed are solved for a range of parameter values. It is shown that allowing for the endogeneity of shop rents, as opposed to treating them as a fixed cost, reverses some well-established comparative static results—when income is increased the market area increases with an endogenous planning authority, whereas with exogenous shop rents the market area decreases. Differences are also established for variations in population density and the costs of travel to the shops.