Christaller's Central Place Theory is primarily used to by cultural geographers to rank cities based upon their population size and their market pull. High order cities, such as San Francisco, have a greater pull than smaller cities, such as Sunnyvale, and because they may serve a larger population they have different functions than lower order cities, such as Sunnyvale or Mountain View. SF has an international airport, large museums, high scale retail shops that a smaller city could not support.

Christaller's theory is actually much more amazing than the simplistic interpretation above. Christaller writes to an economic audience, and he incorporates ideas from Von Thunen into his analysis of markets. Christaller's main task is to identify the relationship between transport cost and the market area. In doing this, he asks the following questions:

1. Where is demand? (the market and intensity of market pull)

2. Is production (service and industrial activity) distributed according to the market area?

Christaller attempts to determine the effect of distance upon consumption.  A concept most market analysts face daily. Christaller builds on Von Thunen's concepts of location rent and economic rent. Christaller examines specific business locations according to what he terms the REAL PRICE of a good. This is the price the business must charge and the cost to the consumer with increasing transportation costs.

For example; if you were buying sausage at $1.50 per lb., consumers located near the market pay no transport cost for this item, and may be pulled to this market due to the low cost of sausage.

But if you lived 15 miles away (with transport cost of $.05/mile) the travel cost would add $1.50 to your sausage costs: the REAL PRICE = $3.00/lb.

If you lived 30 miles away, the travel costs would add $3.00 to your sausage costs: REAL PRICE = $4.50/lb

If you lived 45 miles away, the travel costs would add $4.50 to your sausage costs: REAL PRICE = $6.00/lb.

Even if the consumers who live far away from the market were to buy in high volume, their REAL PRICE for the good remains higher per pound of sausage (due to transport costs).  Christaller saw this real price as the main indicator of demand, or market pull. At some distance from the market, consumers will locate a cheaper substitute or perhaps be closer to a large market that may provide the same good at the same cost (minus the transport).

Most Americans do not figure REAL PRICE into their decision to buy. Most of us will drive further for high order goods (durable items, or high price items), such as a car. But even for this good, there is a distance at which you will lose money based upon your travel costs.

This concept is further defined as:

1. Market Threshold - the minimum demand needed to support a business

2. Market Range - the maximum distance customers are willing to travel to obtain a good. Market range is thought of as Market Area today. Yet, with new technologies, or reduced costs of transport, market areas can change.

In combination, the greater the population density, the greater number of businesses (for example, bakeries or Starbucks) that city can support.  This would reduce the market threshold, since many more consumers are available and willing to buy these goods. Imagine a city with a population of 50,000 and the market threshold for a bakery is 1,000. This means that the area could support a larger number of bakeries.

Based upon the concept of market threshold, we can identify two types of goods.

a. high order goods - as mentioned before these are goods which require a greater threshold, usually due to their higher costs; such as Ferrari or Rolls Royce dealerships, which require a large population with a high income. Airports are similarly high order services,  international carriers will only travel to large cities with a population to fill their planes on a continual basis.

Example: Silicon Valley is a region with high order goods.  On Highway 237, I have seen ads for Jaguars and Porsches.  Yet, if you were to drive through poor regions, these ads are not found. 

b. low order goods - are goods which require a low threshold, and are usually considered to  be cheaper, basic necessities, such as milk, or bread. Most people will not travel far to     obtain these items, and they are found inmost locations despite size of the population. In       large cities, there will be many more opportunities to buy low order goods since the market    threshold for these goods is so low. Our bakery case study is an example of a low order       good.

Example: Starbucks has become a good example of low order consumption.  How many Starbucks can locate in one city?  What distance apart do they need to be to capture greatest demand and not diminish overall demand?

As you will throughout Chapter 7, businesses calculate the market range of their good or service. This will determine the number of franchises they need to fill the market niche they serve.

Losch and Hotelling built upon Christaller's theory. They tried to explain why similar businesses (such as bakeries, high tech industries, and retail shops) all clustered together. This contradicts Christaller's hexagonal patterns of market range and threshold. But Hotelling (examining ice cream sales) and Losch (examining agglomerations) came to the conclusions that such clusters stimulated much greater market pull, since many consumers may be pulled to the mall for a particular store, yet since the distance to the next competitor is so small, actually buy their good some place else.

Malls aggregate all retail demand. Consumers may be pulled to the mall to purchase clothing, yet actually consume food or durable goods (TVs, refrigerators...) from the mall. Clustering of businesses then reduces the location cost for each business and increases market threshold and range.

UTILITY OF CHRISTALLER'S THEORY:

1. locates the market area for producers, analyzing

        * threshold (minimum population needed)

        * range (distance consumers willing to travel)

        * income base of population (Central Place Hierarchy)  This becomes a very simple       
           analysis of population density and income of the market area.

2. enables consumers to locate retailer, based upon

        * cost of good

        * Real Price (inclusion of transport costs)