Market Areas in General Equilibrium

Abstract

This paper proposes a spatial model with a realistic geography where a continuous distribution of agents (e.g., farmers) engages in economic interactions with one location from a finite set (e.g., cities). The spatial structure of the equilibrium consists of a tessellation, i.e., a partition of space into a collection of mutually exclusive market areas. After proving the existence of a unique equilibrium, we characterize how the location of borders and, in the case with mobile labor, the set of inhabited cities change in response to economic shocks. To deal with a two-dimensional space, we draw on tools from computational geometry and from the theory of shape optimization. Finally, we provide an empirical application to illustrate the usefulness of the framework for applied work.