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"To what extent does location give competitive advantage to firms faced with rivals"

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Introduction

"To what extent does location give competitive advantage to firms faced with rivals" The location of firms depends on factors such as cost, quality of inputs and even their availability. These factors can vary from place to place so this gives firms an incentive to locate in the lowest cost locations with other things being equal. The location for most firms is highly dependent on labour costs and raw material costs as these are naturally less mobile place to place and almost completely immobile country to country, capital does not have as much effect on the location of a firm. Differences in labour costs are one determinant of location but on a regional scale in the UK there is not a substantial difference. The importance of raw materials as a factor determining location can be a problem as on some occasions the availability of raw materials dictates the location of a firm e.g. coal mining. With the improvement of transport systems and with raw materials accounting for a smaller proportion of total costs, firms are now more able to choose locations based on other criteria. Lower costs enable firms to make more profits, these lower costs also allow for firms to be more competitive to gain a greater market share. ...read more.

Middle

Sellers are at points A,B,C and D, the vertical axis measures delivered price. For simplicity factory prices are the same at base price and face same transport costs per mile. Curved lines show price buyer will have to pay at any distance. As the distance increases so does delivered price but at a decreasing rate. The limit to each firm's sales is where price lines intersect with neighbouring sellers. Buyers at each intersection have a choice of two sellers each quoting same delivered price all other buyers have one seller offering price lower than its rival owing to its transport cost advantage. Delivered prices are a form of price discrimination as buyers are discriminated on the basis of their distance from the supplier. Base point pricing is a form of delivered pricing, the base price here is the factories door price of a particular firm at a particular location. The agreement of all firms to set some base price amounts to an agreement to share market based on geographic proximity of the buyers to the sellers this is similar to a cartel. Suppliers in a competitive market who have similar production costs and face similar transportation costs must use a delivered pricing scheme to compete for sales in a spatial market. ...read more.

Conclusion

In diagram (1d), on average consumers have to travel less, so transportation costs decrease. This situation would only occur if there were some sort of government policy. If firms started to charge different prices demand would become elastic, this would affect the market of the firms. (2a) In diagram (2a) firms are located in the middle of the market, no one will pay more than the price set (price ceiling) this causes the market to be limited to X and Y. If a third firm were to be introduced (Firm C) in diagram (2b) it could shut out Firm A's entire market share. (2b) The best solution for all firms is to spread out, there are no economies of scale as there are price differences, a Nash equilibrium is unlikely to occur in this situation. Location can give firms a competitive advantage but not on entirely on its own, a location can initially give a firm an advantage but in the long run other firms are likely to follow. If firms want to be competitive they need to consider other strategies such as trying to be cost leaders or try and produce a better quality product, advertise or differentiate their product from other products. Firms end up satisficing, unless inside information is known. If one firm acts first others tend to follow and crowd out the market. ...read more.

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