Locational Interdependence Theory

Written by mark fitzpatrick
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Locational Interdependence Theory
For Hotelling, a beach is a place where many businesses could thrive. (NA/AbleStock.com/Getty Images)

Locational interdependence is a complex term that combines geography with business relations. The idea behind this theoretical concept is to see how an area of space, like a specific geographic area, helps a business with its profit making. Unlike other theories of geography that state businesses need cheap places to be located for low costs, locational interdependence argues a business needs a place where profits are easily made because of the location.

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Harold Hotelling

The economist Harold Hotelling is the theorist who created locational interdependence. He argued that a business must take advantage of the markets found in a location to increase revenue. He famous example is a beach, which is the best kind of area for competitive ice cream vendors to sell their product. The ice cream vendors should not be afraid of the competition or the dense environment of beach goes; the vendor must tap the resources of beach goers who may want ice cream to cool off their day.

Reasoning

A business needs competition in order to innovate and help consumers chose between vendors. If one vendor supplied ice cream in Hotelling's model, then there would be a monopoly at the beach. Often a business might want to choose an area with less competition to survive better, but having a business next to another business is helpful to consumers by giving them choice and giving the geographic area increased economic activity.

Spatial Assumption

The benefit of locational interdependence comes from businesses that are localised. For example, cross-state or cross-national businesses that sell to a local market may, in theory, have a tough time competing with an area of locational interdependence. This is because the firms are more localised and have a oligopoly on the supply and the demand. This is not to say a chain or national brand does not perform well in a spatial area. However, if a market, say in the city of Chicago, is exclusively dominated by Chicago vendors, then a vendor from Los Angeles that creates a franchise in Chicago may have a tough time, at first, competing with the Chicago firms.

Turn Toward Equilibrium

Although competition may end up harming a business by putting it out of business, the theory of locational interdependence states that most vendors create a situation of equilibrium. This means that neither produce such profitmaking that it saps the demand from another vendor. For example, if one vendor sees the other vendor having a sale from across the street, that other vendor can immediately react with a lower sale. In the end, both vendors tend to create a market equilibrium, helping their businesses stay afloat but neither of them taking control of the local market.

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