The problem of geographic market definition: Geographic proximity vs. economic significance

Abstract

This paper has challenged the views that geographic markets must be made up of contiguous areas and that one should expand continuously from some baseline location when applying a shipments-based market definition procedure. If volume of shipments, rather than immediate proximity, is used as the ranking criterion for adding trading locations to meet the threshold percentages, geographic markets may well be composed of noncontiguous areas. There are a number of possible reasons why noncontiguous geographic markets might exist. Among the possibilities that have been suggested are differential production costs coupled with nonlinear transportation costs, and asymmetric transportation costs. These have been illustrated using a simple theoretical model of spatial competition. The empirical relevance of the concept has also been demonstrated by identifying noncontiguous geographic markets for several products using a shipments-based market definition procedure and the U. S. as the baseline market.