MARKETS, PRICES, AND INTERREGIONAL TRADE

1978 by Mrs Raymond G. Bressler and Richard A. King. MARKETS, PRICES, AND INTERREGIONAL TRADE RAYMOND G. BRESSLER, JR. and RICHARD A. KING

5co"H~ J-r^'H 1978 by Mrs Raymond G. Bressler and Richard A. King. SCOTT H IRWIN UNIVERSITY OF ILLINOIS

MARKETS, PRICES, AND INTERREGIONAL TRADE

MARKETS, PRICES, AND INTERREGIONAL TRADE RAYMOND G. BRESSLER, Jr. RICHARD A. KING

Originally published by John Wiley & Sons, Inc. Copyright assigned to Mrs Raymond G. Bressler and Richard A. King, November, 1978 All rights reserved. No part of this book may be reproduced by any means, nor transmitted, nor translated into a machine language without the written permission of the publisher. Library of Congress Catalogue Card Number: 70 112845 SBN471 10305 5 Printed in the United States of America NORMAN-WEATHERS PRINTING CO. Raleigh, N. C. 27628

FOR RGB III, PAK, and friends

PREFACE This book is devoted to the study of the central core of our economy the marketing and pricing system. The operation of this unseen and largely automatic system directs the concurrent flows of resources to their myriad uses and of goods and services to their ultimate consumers. These flows include the production of services such as transportation, storage, and communication that bind the economy into an effective and integrated whole. Although there are many social objectives to which marketing may contribute, the direct and fundamental goals for the marketing system are (1) to provide efficient and economical services and ownership transfers in the movement of commodities from producer to consumer, and (2) to provide an effective and efficient price-making mechanism. Only insofar as the prices that are established through the marketing system transmit the demands of consumers back to producers and transmit the supply conditions forward to consumers with a minimum of lags, imperfections, and distortions, can the economy achieve the efficient allocation and the economical use of resources in satisfying wants. From this viewpoint, the first objective, relating to efficiency in the handling and the transferring of commodities, is simply a specific aspect of the second. The creation of marketing services does not differ from other productive processes in this respect, and the efficient operation of the pricing mechanism includes the economical allocation of resources to marketing uses. Thus, the real and direct contribution of the marketing system is to provide for and to participate in price formation, with the understanding that the pricing system will have as its prime functions the guiding of the allocation of resources into production (including marketing) and the rationing of goods and services in consumption. Our objective has been to provide a textbook that emphasizes the interdependent nature of economic activities and the strategic role of marketing in the total economic system. Our approach is analytical and uses economic theory to interpret the essential nature of marketing processes, but with frequent illustrations and factual applications.

Viii PREFACE 1978 by Mrs Raymond G. Bressler and Richard A. King. These illustrations are drawn largely from agriculture, and many center on the marketing of milk. For an illustration to be useful, it is important to understand the setting from which it is drawn. Most of us will be familiar with milk "factories," since cows are to be found in every state in the Union. Furthermore, although the marketing of milk may now involve some less familiar procedures than was true a few decades ago, the scope of milk problems extends through the space, time, and form dimensions of market price to encompass interesting problems of efficiency and public policy. Although some may believe that this is the milkman's approach to markets and trade, there is a large body of research data, readily available from studies during the past half century, from which we have drawn. Our goal, then, is not to train milk-marketing economists but to show the ready adaptability and power of the theoretical tools that are presented in the solution of a variety of problems that exist in the real world. In Part I, we briefly discuss the growth and evolution of the American economy from the subsistence farming widespread in the Colonial period to the complex industrialized exchange economy of the 20th century. Our discussion serves the twofold purpose of providing illustrative material that can be drawn on later to clarify theoretical points and of encouraging the reader to view the economy of mid-20th century America as a snapshot of a complex and rapidly changing system. In Part II, we examine the spatial dimension of market price. The theoretical framework treats an economy in which a specified set of commodities is available in given locations, although they may move from site to site in response to price incentives. The entire question of the location of economic activity revolves around the issue of how, if at all, the cost of doing business is affected by site that is to say, the spatial characteristics of prices and costs. In this respect, this book differs from most economic treatises, which deal largely with a pinhead economy that is, an economy that has no space, form, or time dimensions. In Part III, we introduce the form and time dimensions to produce an interdependent system of prices with three dimensions. Part IV deals with regional specialization and trade. In this section, we consider an economy in which given bundles of resources may be used to produce a variety of sets of commodities in a given region. These commodities may then be moved from site to site in response to price differences. In Part V, we remove a final constraint and allow resources themselves to move from region to region. Here we examine an economy in which certain of the resources may be moved from one site to another to be used in the production of a variety of sets of commodities which, again, may be moved from site to site as the price conditions may dictate.

PREFACE ix We close with a few remarks concerning the contributions of marketing to economic development and to the general welfare. This text is directed toward advanced undergraduate students or, with appropriate supplementation, toward graduate students. We assume that these students have some knowledge both of economic theory and of facts descriptive of the economy in general and of marketing institutions in particular. However, we have attempted to provide factual and theoretical background material, that is adequate to offset any major deficiencies in these prerequisite areas. It should be acknowledged that this book does not provide instruction on the merchandising activities of marketing agencies. Instead, it attempts to provide an understanding of the nature and of the operation of broad economic forces. As such, we offer it as the basis for a full-year course in the economics of marketing. Courses organized on the basis of a single semester or quarter will no doubt use only part of the material presented. Although the selection should depend primarily on the interests of the instructor and on the previous training of the students, we suggest that Parts I, II, III, and IV would be most appropriate for less advanced classes. Graduate students may well emphasize Parts IV and V, with only a brief consideration of the earlier chapters. Finally, some instructors prefer to emphasize the broad aspects of markets and pricing; for them, it would be appropriate to eliminate certain sections that treat in detail the problems of the marketing firm. Perhaps it is not too much to hope some of the excitement will be sensed that we have shared with our students as excess demand curves, transfer functions, price cones, market boundaries, and multiple-product price relationships have come to light in spatially separated markets such as Storrs, Connecticut; Berkeley, California; Raleigh, North Carolina; Naples, Italy; and Lima, Peru. We are indebted to many individuals who have contributed directly or indirectly to this work. We thank particularly our present and former colleagues at the University of Connecticut, at North Carolina State University, and at the University of California.

CONTENTS PART I PROLOGUE Chapter 1 The American Economy: Colonial Days Through The Civil War 3 1.1 The Colonial Powers in North America 4 1.2 The American Colonial Economy 6 1.3 Territorial Expansion of the New Nation 8 1.4 Transportation and Communication 11 1.5 The Growth of Economic Specialization 18 1.6 The Situation at the Close of the Civil War 21 Selected Readings 22 Chapter 2 Development of an Advanced Economy: 1870 to the 1960's 23 2.1 Economic Specialization and Regional Growth 23 2.2 Increasing Output and Productivity 28 2.3 The Maturing Transportation and Communications Systems 31 2.4 The Agricultural Revolution 35 2.5 The Expansion and Relocation of Manufacturing 38 2.6 Emergence of the Service Industries 41 Selected Readings 45

xii CONTENTS 1978 by Mrs Raymond G. Bressler and Richard A. King. Chapter 3 Economic Interdependence and Interregional Trade 47 3.1 Interdependent Economic Activities 48 3.2 Interdependencies within the Agricultural Sector 52 3.3 Some Reasons for Regional Specialization 54 3.4 Some Examples of Regional Specialization 57 3.5 Interregional Trade Flows 63 3.6 The Mobility of Production Factors 66 Selected Readings 69 PART II THE SPATIAL DIMENSION OF MARKET PRICE 71 Chapter 4 Market Price in an Exchange Economy 73 4.1 Introduction 73 4.2 Concept of the Market 74 4.3 Individual and Aggregate Demand 75 4.4 Individual and Aggregate Supply 76 4.5 Price Equilibrium 78 4.6 Joint Demand for Goods and Services 81 4.7 Multiple Price Markets 83 4.8 The Perfect Market Concept 84 Selected Readings 85 Chapter 5 Price Equilibrium in Spatially Separated Markets 86 5.1 The Two-Region Case 87 5.2 Introduction of Transfer Costs 89 5.3 Multiregion Models: Production and Consumption Fixed 93 5.4 Multiregion Models: Programming Solution 94 5.5 Production and Consumption Variable 100 5.6 Limitations of Single-Product Analysis 106 Selected Readings 107

1978 by Mrs Raymond G. Bressler and CONTENTS Richard A. King. xiii Chapter 6 Space and Transfer Cost 108 6.1 Components of Transfer Cost 108 6.2 Distance-Cost Relationships 109 6.3 Transfer Cost Surface 111 6.4 Effect of Transport Network on Cost 112 6.5 Alternative Modes of Transportation 114 6.6 Combined Modes of Transportation 116 6.7 Collection and Delivery Routes 119 Selected Readings 123 Chapter 7 Markets With Spatially Dispersed Production 124 7.1 Spatial Dispersion 124 7.2 Site-Price Surface 125 7.3 The Law of Market Areas 126 7.4 Boundaries between Competing Markets 127 7.5 An Example of Interrelated Markets 130 7.6 Minimizing Transfer Costs 132 7.7 Production Costs and Irregular Transfer Costs 136 7.8 Applicability to Real Markets 137 Selected Readings 139 Chapter 8 Efficient Organization Within Market Areas 140 8.1 Efficient Product Assembly 140 8.2 Isolated Plant Sites 141 8.3 Competing Plants 144 8.4 Processing Plant Numbers and Costs 145 8.5 Efficient Distribution Systems l49 8.6 Spatial Monopoly 153 8.7 Mathematical Note on Efficient Spatial Allocation 155 Selected Readings 159

xiv CONTENTS 1978 by Mrs Raymond G. Bressler and Richard A. King. PART III FORM, TIME, AND SPACE DIMENSIONS OF MARKET 161 PRICE Chapter 9 Price Equilibrium With Alternative Product Forms 163 9.1 Product Form Choices 163 9.2 Product Price Boundaries 164 9.3 Role of Processing Costs 166 9.4 Short-Run Plant Costs 167 9.5 Measurement of Plant Costs 169 9.6 Harmony among Stages 172 9.7 Time versus Rate Dimensions of Plant Output 173 9.8 Multiple Service Plants 176 Selected Readings 181 Chapter 10 Multiple Product Forms and Spatially Separated Markets 182 10.1 Net Values of the Raw Product 183 10.2 Identification of Product Boundaries 185 10.3 Role of Market Demands and Supplies 186 10.4 Point Trading, Space-Form Models 189 10.5 Competing Markets with Production Dispersed 192 10.6 Seasonal Variation in Product Boundaries 195 10.7 Selection of Product Form 197 10.8 Long-Run Adjustment to Seasonal Variations 200 Selected Readings 204 Chapter 11 Temporal Market Price Relationships 205 11.1 The Time Dimension and Storage Costs 205 11.2 Two-Period Demand Case 206 11.3 Multi-Period Demand Case 211 11.4 Carry-Over between Production Periods 216 11.5 Fat Years and Lean 219 11.6 A Spatial and Seasonal Illustration 221 11.7 Concluding Observations 227 Selected Readings 228

CONTENTS Chapter 12 Price Discrimination Among Markets 229 12.1 Types of Price Discrimination 229 12.2 Modes of Behavior of the Firm 230 12.3 Price Elasticity Reviewed 232 12.4 Revenue Functions Reviewed 236 12.5 Price Differentiation among Markets Space 240 12.6 Price Differentiation among Markets Form 247 12.7 Price Differentiation among Markets Time 249 12.8 Price Differentiation among Markets Form, Time, and Space 253 12.9 Summary 257 Selected Readings 258 XV Chapter 13 Nonprice Factors Affecting Trade 259 13.1 Types of Intervention 259 13.2 The Pink Milk Caper 260 13.3 The World Sugar Market 262 13.4 Northeast Milksheds and the Canadian Border 266 13.5 Fresh Vegetables in Midwinter 272 13.6 Administered Pricing 272 Selected Readings 275 PART IV REGIONAL SPECIALIZATION AND TRADE Chapter 14 Short-Run Trade Flows 279 14.1 The Concept of Utility 280 14.2 Consumer Equilibrium 282 14.3 Barter between Individuals 283 14.4 Individual "Offer" Curves 286 14.5 Short-Run Regional Offer Curves 288 Selected Readings 291

xvi CONTENTS Chapter 15 Regional Production Potentials 292 15.1 Alternative Production Opportunities 293 15.2 Opportunity Cost Curves Single Homogeneous Factor 296 15.3 Opportunity Cost Curves-Multiple Factors 302 15.4 The Long-Run Opportunity Cost Curve 305 15.5 Factors Affecting the Opportunity Cost Curve 309 Selected Readings Chapter 16 Long-Run Regional Specialization 314 16.1 Production Adjustments and Individual Offer Curves 314 16.2 Regional Production and Trade 316 16.3 Product Prices and Factor Prices 318 16.4 Regional Differences in Production Technology 323 16.5 The Gains from Trade 323 Selected Readings 325 PART V SPATIAL ARRANGEMENT OF ECONOMIC ACTIVITY 327 Chapter 17 Land-Use Equilibrium Models 329 17.1 The Nomadic, No-Choice Case 330 17.2 Site-Rent Surface 331 17.3 Equilibrium Market Price 332 17.4 Factors Influencing Site Rents 334 17.5 Site Rents and Production Zones 336 17.6 The Effects of Differences in Land Quality 338 17.7 Land-Use Equilibrium with Multiple Markets 342 17.8 Comparative Advantage, Specialization, and Trade 345 17.9 Opportunity Cost Curves and Transfer Costs 347 17.10 Two Illustrations 350 Selected Readings 352

CONTENTS Chapter 18. Spatial Equilibrium With Mobile Resources 353 18.1 Spatial Distribution of Raw Materials 354 18.2 Production Location: Single, Localized Raw Material 354 18.3 Production Location: One Localized and One Ubiquitous Raw Material 358 18.4 Production Location: Two Localized Raw Materials 359 18.5 Unequal and Nonproportional Transfer Costs 362 18.6 Optimum Location with More Than Three Points 365 18.7 Alternative Raw Material Sources and Nontransfer Costs 370 18.8 Labor as a Mobile Resource 371 18.9 Some Unresolved Issues 372 Selected Readings 373 xvii Chapter 19 General Equilibrium in an Isolated Region 374 19.1 A Simple General Equilibrium System 374 19.2 A Modified General Equilibrium System 377 19.3 Linear Programming Formulation with Fixed Resource Supplies 379 19.4 Linear Programming Formulation with Alternative Production Processes 380 19.5 Introduction of Intermediate Commodities 381 19.6 Consideration of Joint Production 386 Selected Readings 386 Chapter 20 Multiple-Region Production and Trade Models 387 20.1 An Output-Oriented Formulation 388 20.2 A Resource-Oriented Formulation 391 20.3 Location Rents 393

xviii CONTENTS 20.4 Multiple Resource Restraints 396 20.5 "Trade in Intermediate Commodities 397 Selected Readings 401 Chapter 21 Efficiency in Marketing 402 21.1 Efficiency of Marketing Firms 403 21.2 Alternative Marketing Systems 408 21.3 Efficiency of Marketing Systems 410 21.4 The "Ideal Market" and Marketing Research 414 Selected Readings 416 Index 419

MARKETS, PRICES, AND INTERREGIONAL TRADE