Regional Science and Urban Economics 12 (1982) 529-545. North-Holland Pub ishin,!

c’ompany

LOCATION THEORY AND TRANSPORTATION COSTS

FranCois LOUVEAUX*
Fact&% Universitaires Notre-Dame de la Paix, Numur. & lgiw?

Jacques-Franqois THISSE and Hubert BEGUIN*

UniversitG Catholique tie Louvain. Louvain-lu- Nwve. 134X t!!&ium

Received July 198 I

In th s paper, we consider the problem of locating one firm within iL transportation ne~~orh.
For this problem, the main known result, called the Hakimi theorem, states that an optimal
location of the firm is either a market or a node of the network. Our purpose is to extend this
result in two directions. First, when several transportation modes exist, WC show that the
junction points between different modes can also be optimal locations. Second, we study the role
of the fixed transportation costs. We prove that markets are local optimal locations when such
costs exist, and that a market is the only optimal solution under specific assumptions about the
size of the fixed costs. Simulation is used to illustrate the relevance of the approach.

1e Introduction
Ever since Weber (1909), there has been a permanent interest in the
transportation aspects of the location probiem of the tirm: transp<)rtation
facilities are considered as a major location factor and the minimization of
the total transportation cost is regarded as a basic objective. Now, curiously
enough, location theory has neglected some essential characteristics of the
transportation activity. First, the ‘unilorm plam’ is often taken as the
material support of the shipments; in other words, any straight-lint
movement in any direction is permitted. Yet, actual movements arc allowed
only in some directions. Second, transportation rates are assumed constant,
whereas real world tariffs suggest that marginal c<>sts arc decreasing. ‘Third.
only one mode and one set of transfer functions are usually retained. On the
contrary, it Feems that many transports involve one or mora changcx in
mode; in this case, different sets of transportation cost func:tions L~I’CI:() hc
considered. Fourth, and last, while fixed costs i.c., indt*~enclent 01 the
length of the haul -- do exist, their implications for the location de&or! 01’
the firm are not formally analyzed. It is the authors’ belief that progr%:$s in
location theory requires taking the above characteristics into account.

*The authors are greatly indchtcd to I_. Gevcrs and P. Hanjoul for helpful comments and
suggestions.

0166 0462/t(2/0000 0000/$02.75 \$.:j1982 North-Holland

RSUE-c
 F. lmwuux cf al.. Lmurinn thmry ad franspwforinn c‘trsfs

751~ first two characteristics already received much attention. To the best
f our knowledge, Hakimi (1964) was the first to formulate the problem
ec. k?Iered by Weber within the network framework. At an earlier date, Isard
(t956r had been concerned with the impact of concave transportation costs
on the firm location. Combining these two approaches, the following result,
called Hakimi theorem. holds: the candidate-mlution se?, i.e., the set which is
known to contain at least one optimal location, is limited to the set of nodes
and input and output markets. The interested reader will find a delailed
exposition of recent developments of this theorem in Handler and
Mirchandani (1979).
‘Phc purpose of the paper is to take inta account the last two above-
mentioned characteristics one at a time. Interestingly, these integrations lead
to opposite consequences upon the candidate-solution set. Regarding the
modat choice. we show that the Hakimi theorem is extended in the sense
that the candidate-solution set contains the junction points in addition to the
nodes and markets. Concerning the last characteristic. we retain a particular
class of transfer functions exhibiting fixed costs. For this class of functions,
any market is then shown to bc a local optimum. Moreover, we prove that
the citndidatc-solution set reduces to the set of markets when the fixed costs
;Irc I;lrge.
l’hc p;~p~ I\ crrganrled as follows. Section 2 presents the Ilocation probtcm
of the firm m the context of a transportation network-space. The neo-
clausal Itbcatton prohlcm is introduced and its relation to the Weber
problem I\ %trc\S<d. The Hakimi theorem is recalled in a formal way. Section
3 introduce\ the multimodal component in the location problem of the firm
and slalcs the corresponding Iocali;rdtion theorem. In section 4, we define
two classch of functlcms ivhich enab!e IIS to cope with fixed costs and we
prove two theorems on local and global market optimality. Simulation is
used to illustrate the relevance of these theorems. Final remarks are listed in
sect ion 5.

2. The location problem of the firm

2.f. Roughly speaking. a transportation network-space can be viewed as a
\ct cjf pt>inti; Itnked f,> routes endowed with a shortest distance defined or1
rhi, ict. Starting from thic intuitive representation. ITzing and Fran:&
119741 ;gnd Thi\tc (10751 has-e prnpclwd a definition in terms of topological
;ircI and metrrt \p;icr. \chich has proved to be very operational. In th(o
fnll~Gn~_ UC limit otrrsA\c\ to ;i brief presentation of the formal concepts;
thy’ inierc>tcd reader will find a more detailed treatment in the above
references.
Take d particular transportation mcjde. Let t’ be a finite subset of the real
pknnc R’. ,t point I c 1’ 14 c;iiIclf ;I I t’rft~\ ;ind correspond5 to ;i node or to ;I
 F. Louueaux et al., Locution theory and trunspurtation cost.s 531

malket. Some pairs of ver.ices ale linked by basic routes, i.e., routes which
do not pass through other vertices. Derrote by .&‘{u,,v~) the set of basic
routes with endpoints ui and Uj* Intuitively, a basic route RE.G@{u~,o~)is
expted to be a L~~ntinu~u~ sequence of different points’ of the plane.
Formally, a basic EM&Zwith endpoints Ui and Uj is defined by the image-set of
a mapping x(0) from [O, 1J to IR2 such that (i) x(O)= ui and x( 1) = vi, (iij j;(e)
is continuous, and (iii) x(0) is injective. Accordir:gly, R is completely,
univocally and continuously described when the parameler 8 varies from 0 to
1. For mathematical simplicity, we do not distinguish two basic routes which
differ only by the orientation: x([O, l])=Z{‘(cO, 11) where 2((e)=.x( I- 0). Tht set
of basic routes with endpoints in I/ is taken as finite and denoted 3’. The
network X corresponding to the given transportation mode is defined by the
union of the basic routes belonging to .#.
A distance may be associated with the network. For this purpose, WC first
asu;me that each basic route of 9 has a well-defined tinite’length. We then
introduce the concept of subroute. Let Xi and xi denote any two points of a
basic route of 4!{Ui,uj>; the suhrolrte with endpoinls Xi and “j is, by definition,
the image of the restriction of x(0) to a subinterval [SiyOj] of [0, l] such that
x(Ui)= Xi and X(Bj)=xi. Two (sub)routes are called adjacent when they have a
common endpoint. Finally, a route R of A’{Xi~X~)with mdpoints Si E X and
.xj~X is defined as a sequence of adjacent basic routes and subroutes linking
xi and sj and passing at most pnce through a vertex. For obvious reasons of
accessibility, we suppose that \lt least one route links any pair of network
points. By definition, the length of a route R LS equal to the sum of the
lengths of the basic routes and subroutes which fi,xrn K. The shrtcst disttrrwc~
d(.u,,.x,) between xi and xj I? equal to the length of the shortest route joining
xi and xi. ii is clear that d is 3 metric defined on X.
The metric space (X,d) associated with a mode is called a trccnsportution-
net work-space.

2.2. The neo-classical lordricpn problem (in short NCLP) is defined as follows.
(N-i) Th: set of outputs of the firm is G,,; an output is identified by ,YE Go.
(N-ii) The s:t of production inputs of rhc firm is Gi; an input is identified
by <qE C;i.
(N-iii) The location possibility set S is a si.lbset of the net ,vork; 8 possible
location is denoted Iby s.
(N-iv) The production function of the firm is given by .f‘(q,) = ,! \r,here y, is
the vector of the :luantities of outputs ;Ind inputs. The production
function is independent of the firm location.
(N-v) The set of markets where output RE GO can be sold is 31,~ V; a
ma!-ket is denoted by m.
The invcrce dtmancl frlnction TT,,~(~,,,,,)cxprcsses the price that the
53’ F. hwaus t-t d., hearion rhcorryand rransprution cosrs

customers located in rn~ M, ate willing to pay when the quantity 9#”
is sold there Let ~,[d(s,nt)] be the unit transportation cost of good
g E G, between location SE S and market rn~ M,; C, is a non-
dcxrcasing function of the shortest distance between s and m.
Independently SC the agents who pay the hauling charges {the
customer or the firm), the demand function considered by the firm is
nat ngn,but the function pnnrdefined by

PgJ9giW&* WI= q&&ls~

- ~,C&NJ (1)
(N-vi) The set of mark~s where input g E G, can be purchased is M, E k’; a
market is denoted by m.
The inverse supply fun&on is 1r~(9~,J and the unit transportation
cost c,[&u.s)]. As in the output case, the true supply function faced
by the firm takes the hauling charges into account:

(2)

IN-vii) The firm chooses a vector of quantities qem and a location s with the
aim of maximizing its prcrfir$uncfion:

f--ormally. the NCLP is therefore defined by the non-linear program

In (41, the competitive case obtains when functions rrgm are

independent of the quantities sold and purchased respectively.

Denote by (q&,,s*) an optimal solution to (4); location s* is called a pro/f-

ntd rirni:iqq situ.
In any given location SES, the total transportation cost T(s) associated
with quantities q$, is defined bq
 F. Lmtwaux et al., Location theory and transportation costs 533

Theorem 1. A possible location is a profit-maximizing site $ untl only if it is

un ex post Weber site,

To a certain extent, this result justifies the Wcberian approach to the location
problem since the iocalization theorems proved in the context of the
minimization of the total transpori;ation cost, Le., the properties of a
minimizer of T(s) for unspecified but fixed quantities, remain valid within the
more general framework of profit maximization. Consequently, for our
purpose, we may limit ourselves to the Weber problem introduced below.

2.3. In the following, we define the Weber problem (in short WP) in a
compact fsrm:

(W-i) The set of markets with which the firm is related is given by M (for
instan% M = U@EGo” GiM,); a market is repr’ssented by m E M.
(W-ii) The location possibility slet S is a subset of the network.
(W-iii) The transportation cost between SES and mc M is given by a non
decreasing funcltion of the shortest distance; it is denoted
C, I% ml].
(W-iv) Th!: firm is to be located in a point of S where the total
transportation cost

T(s) = mTMCMs, 41 (6)

is minimized.
In summary, the WP is expressed by the program

min T(s) subject to SEX (7)

Any solution to (7) is called a Weber site.

For our purpose, the first basic hypothesis is the concavity of the
transportation cost functions C,. As pointed out in the introduction, real
transfer rates show that the variable transportation costs are less than
proporticnal to distance or, if not, roughly linear with respect to distance
[see, e.g., Isard (1956), Locklin (1960) and Hoover (1973)]. Stated differenlly,
the actual marginal transportation costs prove tp be decreasing or
approximately constant as the length of the haul Increases. Hence, we are
justified in assuming that the functions c9, and consequently the functions
C,,,, are strictly conceve in the distance. The following localization theorem,
c.alled Hakimi theorem, then characterizes the solution to (7) [see Hakimi
(1964), Levy (;967), Wendell and Hurter (1973) and Thisse (1975)]:
534 F. Louvtwux et al., Locution theory nnd trunspcstatinn coats

Theorem 2. If the transportation cost functions are conrace and f C’CS then
I’ cmtains at lcmt orw Weher site. Furthermore. !f ime transportcrtion cost
jiiotc~lion is slricrl,v wt1i’ttW. rhf_w any Wkher site helonps to b:

In words, the Hakimi theorem states that, under fairly general conditions, at
least one optimal location belongs to the set of vertices. Most probably, the
site chosen by the firm will be therefore a remarkable site of space, in the
sense that it is a market or a node endowed with a high degree of centrality.
What kind of point is ultimately selected depends on the configuration of the
network, on the relative position of the markets and on the form of the
transportation cost functions. Moreover, as V is a finite set, Theorem 2
implies that the WP and the NCLP defined within a network-space are finite
problems. Both these characterizations of the location problem of the firm
are in agreement with the non-formal developments made by lsard (1956)
and Hoover (1975); they also extend the linear space results recently obtained
by Mathur (1979).

3. Modal interchange location

Observation suggests that many transports resort to different modes rather
than proceeding right through from the origin tc the destination. This
situation tends to become more and more frequent as the ‘numb-r of
available transportation modes increases. Hence, instead of one set of
tl*ansfer functions, the firm now faces different sets of functions, one by mode.
Moreover, the existence of several networks gives rise to a new family of
candidates competing for the firm location. namely the junctio:n points. Their
importance ‘was emphasized by Hoover (1975).
Consider a finite set T of transportaition modes and let {(X,,J,); TV7’1 be
the associated family of network-spaces.
Take any good KE G( = G, u Gi) and let 5 be the set of modes wnich can
be used to carry this good. Given t E T,, a route in X, with endpoints xi and
.~j is denoted R,Ejp,t.~i,.~j) and its length by I(R,). The unit transportation
cost of good R along R, is represented by cJRJ. Assumptions similar to
those made in the single-mode case are retained for mode I:

(M-i) c-JR,) is a function of the good shipped, of the mode used and of
the distance covered, i.e., c,,(R,) = c,,[l(R,)],
(M-ii) c,JR,) is unrestricted with respect to the good shipped and the
mode used,
(M-iii) c,JR,) is a non-decreasing and concave function of the distance
covered.

We now introduce some concepts related to the multimodal nature of the

problem. The multimodal network X is defined by the union UIE z X,. The set
 F. Louoeaux et ol.,Location theory and transpnrtariorr costs 535

of junctiun points between modes ti and t, for good g, denoted .I,; fi, tj). is
given by a subset of Xii n X,,. The set of junction points J, (between all the
pairs of modes) for good I: is equal to []ri.T UjFr:,jf,,~g(fi,Ijl,
For mathematical simplicity, the following addrtional assumption is made:

(M-iv) The cardinality of J,, denoted #J,, is finite.

The loss of generality implied by (M-iv) is likely to be negligible from the

practical viewpoint.
A multimodal route R for good g with endpoints xi E X and Xj E X is defined
as the union of n unimodal routes R f.. . R, determined as follows: (ii1given -\i
=x1 EX,,, where tl E Tg, RI _cX,[ is a route with endpoints x’ and .xj if n = I.
or R, cX,~ is a route with endpoints x1 and x2~Jg(flrt2}, where t,~ Tq,,such
that x2 #x1 if n> 1; (ii) given xk~ XII, with k=2.. .n- 1, R,s A’,, is a route
with endpoints xk and xk+ ’ E JB{t,, t, + I ), where t, + 1 G T,, such that _yk+ ’ # d,
with h=l...k, and xk+l #Xi; (iii) given x”EX,~, R, is 2 route with endpoints
x” and xj=x”’ ‘. Then, we have

R= fi Rk. (8)
k=l

Lemma 1. Route R c~vzl’vts of at most #J, + I unimodal roufes.

Proof: Assume, on the contrary, that R is formed by more than #.I,+ 1

routes. In this case, there would exist a finite sequence of junction points
Xh.. .xk belonging to R such that xh=xk. But this is impossible by
construction of R. Q.E.D.

Denoting by .~,{Xi,Xj> the set of multimodal routes for good s with

endpoints Xi and xi, the above result implies that . ~~~:.Vi, .~j} is finite.
Let CB(Xi,.Yj)be the minimum unit transportation cost of good K between
xi E X and xi E X. Clearly, we have

C,(Xi,.Y,i)=min f cgr,(Rk); R ~.-ff,(.~i~ Xj>‘I‘. (9)

k-l 1

Y x j ) is always defined and lhero cxisL3 iit least one

AS . Iig{ Xiv-Yjf is finite, C&*.i,.
minimal cost route with endpoints .Yiand .Yj:

R*= ij R;,
k-l

where n* depends on tile good shipped and on endpoints Y, and V,

Using Bellman’s principle, we also have
Let us now turn to the definition of the location possibility set. Clearly, for
good LEG to be carried, it is necessary that the firm be established in a site
of VI6 r,X,. This amounts to saying that its location must belong to the
(; !,J,&r,X,. For the sake of simplicity, we suppose that S=
X,.
Given the quantity of pcrod g carried from or to m, the transportation cost
of gc9oJ g between s E S and nt~ 33 may be determined; it is denoted C&m).
The multimode M~Hvrr prd&wt (in short MM WP) is then defined by the
prtq?ritpn

3’0 illustrate the main features of the WP and of the MMWP, let us compare
the expressions of 71s) in (7) and II?) respectively. In the former case, the
route followed between s and m is the same for all goods, which permits the
*summation of the tran<portation costs related to m into a single function
clcpcndinp 4cly on the distance covered. In the latter case, we do not
aggregate rhc costs rclatcd to m. The route followed between s and m now
dcpcnds on the good carried. Moreover. the route cffcctively iollowed for the
tr;tn%port. and no! only its length. dclcrmincs the transportation cost of a
good between .x and m.
In the sequel. the set of vertices elf network X, is denoted by I{.
d,(.~i, s)+~,(.Y. Xj>=I(I?), we also have d,(xj, x(fI))=(l --O)l(W). Thus, for any
good I: and ary market m, w obtain

where t,+ =tand x”* depend on g and m.

Consequently, T[x(d)], with x E 8, is equal to

Cgc,Cdr,(xk,
xk+“)I + c,,C&n(~hI 3

where n*. tk,, . . ., tkn, are functions of g and M. Being the minimum of : wo
linear functions of 8, d,,(B) isconcave w.r.1. 8 on [O, I]. Given that C,+ is
non-decreasing and concave w.r.t. the distance covered, T[x((i)] is concave
on [O, 11. 7’(s) being minimized in s *, T[x(O)] must achieve its minimum at
8* with x(0*) = s*. Since s* #Xi and s* # xJ, 8* e 30. I[. Applying the theorem
of minimization of a concave function [Berge (!966)] therefore yields

T[x(fl*)] = T[x(O)] = T[.u( l,].

AS .Yi= U(O)and ?Cj= S( I), WC then see that

T(s*) = T(?ri) = T(xj). Q.E.D.

This theorem tells us that the junction points are to be taken into account
as well as thi* markets and the nodes. Variety in transportation modes leads
therefore to an enlargement of the candidate-solution set. Interestingly, a
similar conclusion was obtained by Hansen, Perreur and Thisse (1980) in the
WP with several norms, one by mode: the smallest convex polygon
containing M whose sides either are parallel to one axis of (R2 or form a n/J-
ltngle with one axis defines the candidate-solution set, insLad of the convex
hull of M in the case of a single norm. Furthermore, the optimal location is
seen to depend, among other things, on the number and the relative position
of the junction points.
Fina!ly note that the junction points become elements of the candidatc-
solution set because they correspond to break-points in the Iran&
functions. Hence, by a simiiar argument, it could be shown that other typcLs
of break points must also bc intcg:rated. cxamplcs arc provided by bordt:r
points or by entry points in zmcs with specific :ariffs. Situations in whit h
fixed transportation costs vary with the origin and the junction points ic:~d
to the same conclusion.
53X F. Loucvuux et al.. Locrrtion rhtwry and transportation costs

4. Fixed transportation costs and market location

For notational simplicity, we come back to the formulation given in 2.3.
4.1. Following lsard (1956) and Hoover (!975), we wouid like to argue in
this subsection on the local attractiveness of a market Mi for which the
transportation cost admits a fixed component. The intuitive argument is the
following. Consider summation (6). If the firm is established in a market ml,
cost C,i is equal to zero while costs C, are positive for each other market
nt#m,. Assuming now that the firm locates in the vicinity of Mi, we observe a
relatively large increase of C,,,i, due to the fixed cost, and relatively small
variations of other costs, since these are continuous. Hence, provided that the
distance from mi is small enough, we expect the loss entailed by the fixed cost
to exceed the variations in variable costs. In other words, mi should be a
local solution to (7).
Undoubtedly. the simplest way to take into account the fixed component
of the transportation charge is to assume that the function C,i has a
discontinuity at the origin. Formatly, this means that a positive constant
C,,,i(O+)exists such that

C,,[d(S*mi)] 2 C,i(O +) for any S# Mi. (13)

An csample of this class of functions is

C,i[d(S, tni)] =O if S=?~i,

(14)
= Llmi
+ hmid(S,mi) if S# ffli.

where a,i and h,i are positive constants.

However, there exiss in the literature an alternative formulation of the
fixed cost problem, which cam be expressed as follows: the marginal
transportati:jn cost tends to infinity when the distance covered tends to zero
(or, equivalently, when s tends to m,). Formally, we have

C& denotinr,: the derivative of Cmiw.r.t. d. A popular example of this class of

functions is the power cost function:

C’,,LfI(S,f~,)] = ll*, ’ [d(S,mi)]“, (16)

where (I,,,,is ;I posilive constant and r a real in JO, I[.

In the sequel, we consider a genera! class of transportation cost functtons
which includes as particular cases the above classes.
 F. Lmveaux et al., Location theory and transpnrtation casts 539

Definition I. Function Cmi is of class LT* iff for any positive constant K
there exists q(K) > 0 such that

CmiCd(s*
mi)l/d(s9
4 > K (17)

for any s verifying d(s, mi)< q(K) and s # mi.

It is easy to see that any transportation cost which has a discontinuity at
zero belongs to LT*. Indeed,

cmp(s941 2 cmp
+1> K provided q(K) 5 --
Cm,cO*)
4% 4) - 4%mi) K ’

so that (17) is verified. Similarly, as C,JO) = 0, (15) can be rewritten as

iim c,Cd(s.~= + o.
d(s.mJ+0 & 4

which clearly amounts to (17).

In the following theorem, the local optimality property is shown to hold
for functions of class LT”.

Theorem 4. If the tra lsportation cost functions are W~IUW and it‘ the
transportation cost firncticn C,,+belongs to LT*, therl ,nicz M is a local minimizer
of the total transportation cost.

Proof. We have to show that an E>O exists such that T(mi)s T(s) for any
SE B(mi;E) n S, where B(n+;E) is a ball with center q and radius I:. As the
number of basic routes ending at mi is finite, it is sufficient to prove that
T(mJs T(s) for any SE B(mi;E)n R, where R is an arbitrary basic route having
an endpoint in nti.
Given the definition of a basic route, we know that SE R may bc replaced
by x(8) where x(f)) is a continuous bijection from [O, l] on R such tb,at X(O)=
mi. Accordingly, if d,(8) is defined by d[x(fkm], for any VIE Al. T(s)=
~,,,eMC,[d(s,m)], with SE R, can be written 3s ‘I’[x(O)]=I,,,,.,+, c’,[d,,(O)].
with HE[0, I]. Hence, it is suffkient to show that 8~ JO, I] may he found such
that

T[x(O)] - T[x(O)] 2 0 for any 0 E [0, 01.

(Iearly, for any m ,Cm,, we have

d,( 0) = min( 01(R)+ d(mi, m), ( 1 - B)/(R) -t df L’i,m))

As d,t(l) has at most one switch. it is always possible 11) find flmg]O, I] such
that one and only one c>fthe two following conditions holds for OE[Q,&J:

i&(Q)= M(R)i- f&q, m), or

dJO)=(l - @l(R)+ d(Vi*?R)*

Given that C,,, is concave and non-decreasing w.r.t. d,(B) and that d,,(0) is
linear w.r.t. 0, ~,~&,([fl] is concave w.r.t. 0. Since &,(0) is positive and
continuous on [O.&J, &,E ]O. O,] therefore exists such that C’,’d,M)] is
coi~tinuousl~ differentiable on [O*(j,l. Denoting 0= rf.in, fm,&,
\‘
~, u,_D_ C,[d,(B)J is continuously differentiable on CO.$1.
By thk mean value theorem, we find fYE 10, @J such that

As Cmc
,tf.m + m, (d(‘,,,[&,(ll)] d(l) is continuous on [IO.(i3, by the Weierstrass
theorem a constant K, exists such that C,,M.mtm,(dC,[n,(Nt]!dO)L K, for
any 0 E [O,f5]. Accordingly. we obtain

T[ x(01 ] - T[.x(O)] 1 c’,,[nr( R)J + f5K,

for any IJE [O. 8J. let K, 2 jK ,I. Given that C,, belongs to class LT*, there
exists (7~ JO.& such that

for any 0~ ]O.(n. Consequently, we have

The above rcsuit shows that a .market is better than any location situated in
the tmmcdiatelq adjacent area when the associated transportation cost has a
fixed cornponcnt. In the profit landscape. markets therefore appear as major
or mimer peaks. In caszs where the firm is only concerned with locational
possibilities arourrd certain points o;’ 51. this imphes that the best location is
necessarily a market.

4.2. The above theorem does not uay if the highest peak of the profit
land~~pc i\ reached at a market. Yet intuition suggests that such should be
the case when the fixed components of the transportation costs are rc!atively
large as compared to the variable components. To deal with this problem, we
assume that functions C,,, are also a-dependent where a 20 is a parameter
which expresses the relative importance of the fixed component - or
alternatively of the variable ccmponent - of the transportation cost. For
a-4, the transportation costs must no longer be distance dependent and
when sfm‘, C, must be equal to a positive constant measuring the
corresponding fixed cost. In a certain way, c1can be viewed as an inverse
measure of the degree of return to scale in the transportation activity: the
smaller LYis the smaller the part of the variable cost is and the higher the
jeturns to scale are. Furthermore, the firm must always support a positive
transportation charge for any ~20 and any s# m. Formally, these
characteristics are take:1 into account in the following class of functions.

Definition 2. Function C,[d(s,m),a] is of chss LT** iff the following two

conditions hold:
._ a positive constant K,, exists such that

lim C,[tl(s, m), a] = K, for any s # m (18)

a-0

a positive function ~m[~(.~,m)] exists such that

Examples of transportation cost belonging tt: class f,T** are provided by the
linear af!inc and power functions considered in the previous sub-section.
Indeed, with the linear afine function

C,[d( s, m), LY]= 0 if s = m,

= a, + ah,d(.s.m) :f s # 171,

we have lim,,, C,[d(s, m)] =um and C ,[d(s, m), r] 2 u,, which is independent
of r, whatever s#m. Similarly, in the USC of the power function

C,[d(s. m).a] = a, * [d(.s,rn)]“, 3 E IQ 1C (21)

we easily verify that

Pn~of. By the Hakimi theorem. we may limit ourselves to consider the:
points ol V to obtain a Weber site. For the proof, it is then sufficient tcl
determine 2 in order to eliminate the points of I;-- M only. Let o be an)’
verkx of’ 2’- ,\I and tni be any market of XI. As functions Cm verifjj
condition ( 18) and as

exists such that

(*I

for an> 2 t JO, Z,,,,Wf. Now. we know that

Given f*! and (**I. we then easiiy deduce that

-J =
m, mm 2,jr) and 31= max z,,,
#*I w m,i M

WC arc sure tha( a market exists in which the total transportation cost is
h,wcr !h;rn in irny vcrtcu c)f 1’ .\I. Q.F.D.

!VC h;*\.c just shoun lhal a markel localion bccomcs necessarily optimal
when the fixed components of all the transportation costs become relatively
large. In other words. the transportation technologies with large
indivisibilities lcad the firm to disregard any intermediate nodes as candidate
for its location. No better localization theorem can be hoped within the
general framework of the WP assumed here, given that the only remaining
candidate points belong to a single category of sites. i.e., the markets.
F-urthcrmorc. in view of the definition of 5 given in the proof, we notice that
the tcvcl tjf the fixed costs which guarantees the optimality of a market
irlcation decreases. ceteris paribus. as rhe number of markets increases and as
the number of vertlccs of I’ -. .tl decreases.
Let us finall> consider the limit case whey{ the transportation charges are
constan! over the network. i.e.. when z=O in any transportation cost
lunctmn. I he opl~mal market location can now be found. Indeed, we have
Theorem 6. 1’ a = 0 in C’,,,[d,(s, m), or:/,jar any m E M, therl any market mi E M
such that K,i = max,,,,, K, is u Weber sire.

Proof; Let m, be such a market. We then have

since Km,2 K,. Q.E.D.

4.3. A certain number of problerns have been solved on the basis of

randomly generated data, in order to get some insight in the value of ti and
its determinants.
The problems have been generated as follows: the number 1’ of vertices
ranges from 3 up to 20, and the number, of markets from 2 up to the grcatcst
integer less than 2u/3. This upper bounll is thought to bt: the largest one for
which the problem remains meaningl’ul. The coordinates of the vcrticcs
(including those of the markets) are generated ranc’oml,y with a maximum
value of 100 for each. In order to avoid very special distributions of fhc
nodes, the 100 x 100 square is divided into four 50 x 50 subsquarcs and ;I
minimal number of nodes is generated in each of these subsquarcs. For L’:‘:h
market m, the transportation cost fur,ctiion considered is

cm[ d(s, ml); a]= 0, s = m,

(22)
= qm[am
+ ab,d(s, m)], s f m,

where q,,, is the quantity of good to be shipped from or to market m. and (I,,
and b, the fixed and marginal transportation costs associated with that good
respectively. Cocilkients qn, a, and h, arc rar~domly gencratcd, (1,” tnking
integer values Icss than 50, 11, and b,, taking real values less than 100. The
results of the simu,lation are summarized in table I.

Table I
I<csults of the simulaticm.

Number of problems solved 114

Number of problems where ti is unlirnited 43, i.e., 37.7”,,
Number of problems where ci is finite 71, i.e.. h2.3”,,
Mean-value of ei where @is linite /I, -0.238
Standard-deviation of r3where r is Finite cr, rOMh-=3.51/1,
Mean-value of u~c&,~ kc,= 6.1.9
Standarddeviati’on of a,,&&,,, nzT.301 =,’ 71/12
_~_~_~~
“Mean-value and standard deviation art’ computed for the c:cjc%uicn:is
associated with the optimal market Icscation only.
Among the 114 so-generated problems, nearly 3876 have an unlimited value
for 5. i.e., have an optimal location in a market independently of the
proportion between the fixed and marginal costs. This is due either to the
relative position of the market or to the relative value of the product q,,,bm.
For ~‘1 the other problems, the value of $ ranges from 0.007 up to 6.25 with
a mean p, of 0.238 and a standard-deviation of 3.5114,. Observing that the
standard-deviation of a,_/&,,, is also very large suggests that n cannot easily
be predicted.

5. Final remarks

ii) Theorem 3 ~eneralixs the Hakimi theorem by taking into account

points where the transportation cost functions exhibit kinks or
discontinuities. As a consequence, the candidate-solution set is enlarged
by the addition of the break-points. Interestingly enough, this approach
in location theory compares with that followed in the field of inventory
theory. Indeed. as pointed out by Samuelson (1957), inventory costs can
be viewed as transportation costs over time. Given this analogy,
Theorems 2 and 3 are then comparable with those obtained by Wagner
and Whitin I1958) and Swoveland (1975), respectively.
(ii) Theorem 5 .specialixs the ilakimi theorem in pointing out the role of the
fixed transportation costs. Under given conditions, we have obrained a
rArc.fiorr of the candidate-solution set which is now equal to the set of
marhcts. One can expect a similar process to hold in the more general
situation addressed to in section 3. In this case, the candidate-solution
set should contain the markets and tile break-points associated with the
discontinuities in the transfer functions.

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