Model of Spatial Market Areas and Transportation Demand

Abstract

A model of transportation demand and the interrelated supply decisions of agricultural shippers is derived over a geographic space. These shippers use prices to procure grain and to make output, mode, and market decisions. Each decision is affected by the characteristics of the region and the level of spatial competition between the shipper and its rivals. All of these factors are integrated into the model of derived demand and spatial competition. The model is applied to data that represent barge elevators on the upper Mississippi and Illinois Rivers to estimate transportation demands and gathering areas. The results provide demand elasticity estimates for annual volumes between -1.4 and -1.9, which are sizably larger than previous estimates of similar traffic. The results also indicate that inbound transportation rates to the barge shipper as well as distance to the nearest competitor have a significant influence on annual volumes. A second model, explaining the size of the market areas of elevators, is also estimated. The rates of alternative modes that compete for barge traffic as well as distance to the nearest competitor influence market areas. The results provide for a strong argument that transportation demands are elastic and that spatial market areas vary substantially with transportation rates.