Price formation with spatial and temporal uncertainty : an analysis of the role of the CBD

Abstract

Some enduring location choices challenge the conventional models of competitive location allocation. One such is the persistence of market gardens around large urban centres that use locations that are highly valued because of their suitability for all manner of urban uses. These areas have been there since the earliest times, featuring prominently in von Thunen's original model of land-use [von Thunen (1826)] for instance. In spite of several revolutions in transportation, no reduction in unit transport cost has induced a wholesale relocation to cheaper, more distance locations, which would undoubtedly be technically possible under conditions of certainty. Some competing suppliers, however, have become established at locations much further out from the market centre, but they are not dominant suppliers in spite of land costs being possibly ten-fold lower. In other words, location and transport costs together do not offer a complete explanation of these horticultural businesses' differing location decisions. This paper focuses on the distinction between peripheral and central locations and offers an explanation for the central role of the CBD. Under the assumption of certainty in the von Thunen model, and in all classical theory, there is no obvious need for spatially dispersed producers and consumers to avoid trading at the nearest convenient site. Since both parties will be fully informed of their individual circumstances trades between them would seem highly feasible and efficient. The only possible impediment to their trading is a lack of knowledge of the opportunity costs involved; for these to be significant, uncertainty must prevail. The paper begins by establishing the essential role of uncertainty in generating market processes and elaborates the gains to all parties that are derivable. It then examines the essential spatial character of the process and its influence on information quality and efficient price discovery. The distinctive consequences of this at locations away from the price-forming centre are analysed. Finally the suggested model is used to show how centrally placed and peripheral agents differ markedly in available information, exposure to uncertainty, market opportunities and the processes essential for survival.