THE OPTIMAL MARKET AREA FOR A SINGLE STORE REGION: NEW WINE IN AN OLD BOTTLE

ABSTRACT In this paper we present a new solution to the old problem of determining the optimal market size for a single store selling a single good, We maximize average welfare by minimizing the costs of retailing a good to the average customer who pays both to transport and to store the good at home. We show that average welfare is maximized by a two‐part tariff in which the good is priced at marginal cost and there is a lee that covers fized costs. We demonstrate that regional distribution cost per family is a well‐behaved, u‐shaped cost function of the size of the region in every case where a store is feasible The radius at which this quantity is a minimum defines the optimal range of the good if it is less than or equal to the outer range.