Theories of August Losch A. Pred and D. M. Smith

August Lösch 

Profit Maximization Approach to Industrial Location

August Lösch, a German economist, set out his ideas on industrial location in the mid-20th century. His location theory, commonly referred to as the profit maximization theory, was published in the 1950s (notably developed in work often dated to 1954). Lösch criticised earlier location theories such as Weber's least-cost approach and proposed an alternative founded on firms' efforts to maximise profit rather than merely minimise transport or labour costs.

Key idea

The central idea of Lösch is that firms choose locations where their profit is maximised. For Lösch, location choice cannot be reduced simply to minimising a single cost (for example transport); instead, firms consider both the revenue obtainable from a given market area and the total production cost at the location. He developed spatial concepts of market areas and trading zones under conditions of monopolistic competition, where many firms produce differentiated goods and face downward-sloping demand curves.

Assumptions

• Homogeneous plain: the region is taken as an isotropic, flat plain without physical barriers.
• Uniform distribution of population and customers: demand is assumed to be uniformly distributed unless modified by special conditions.
• Uniform transport rates: transport costs increase linearly with distance and rates are uniform across the region.
• Equal access to inputs: raw materials and labour are assumed to be equally available or symmetrically distributed in analyses.
• Monopolistic competition: firms sell differentiated products, and each firm faces its own local demand curve.
• Objective of profit maximization: the entrepreneur (private or state) locates activity to maximise profit.
• Cultural and taste homogeneity (simplifying assumption): consumers are often treated as having similar tastes across the region in Lösch's simplified models.

Explanation of the model

Lösch constructed spatial polygons of market areas around hypothetical plant locations. Each potential plant location has an associated revenue function (depends on market size and price) and a cost function (production, transport and other location-specific costs). The firm chooses the site where the difference between revenue and total cost - that is, profit - is maximised. In an environment of monopolistic competition many firms will arrange themselves across space to capture local demand, producing a pattern of dispersed plants and market areas rather than a single least-cost centre.

Merits

• Restored order to earlier, sometimes chaotic, classifications of industrial location by providing a coherent spatial model.
• Was one of the first to explicitly incorporate the magnitude of demand (market size and revenue potential) into location analysis.
• Emphasised the role of competition and product differentiation as major determinants of spatial location.
• Provided relatively simple calculations and geometric constructions that can be applied to analyse local market areas and profit margins.

Criticisms and limitations

• Model is highly simplified and represents an idealised condition, not many real-world complexities.
• Unrealistic assumptions: homogeneous plain, uniformly distributed raw materials and demand, and uniform transport rates do not hold in most regions.
• Assumption of cultural homogeneity and uniform tastes over an area ignores real differences in incomes, preferences and consumption patterns.
• Ignores many institutional, policy and infrastructure constraints that affect real location decisions.

Applications and implications

Lösch's model is useful for understanding how market potential and local competition shape the spatial distribution of firms producing differentiated products. It informs regional planners about how multiple producers may disperse to serve local demand and how changes in demand or transport costs can alter spatial patterns of industry.

Allan Pred - Behavioural Factors in Locational Decision Making

Background

• Allan Pred addressed the behavioural complexity of locational decisions in a key contribution from 1967. Pred emphasised that firms and decision-makers do not always have perfect information nor equal ability to use whatever information they possess. He offered a conceptual framework - often presented as a behavioural matrix - to show how information availability and the capacity to use it jointly influence locational choices.

Key elements: information and capacity

Pred's framework recognises two core dimensions:

• Availability of locational information: the quantity, quality and cost of obtaining data on potential sites, markets, transport, inputs and regulations.
• Capacity to use information: the skills, experience, organisational resources and governance that allow decisions to be made from available information.

These two dimensions are typically represented as the axes of a matrix. Decision makers fall into different cells depending on whether they have high or low information and high or low capacity to interpret and act upon it.

Consequences for locational choice

Pred argued that most locational decisions are not strictly optimal but are satisficing: they are acceptable and profitable within a margin. This leads to the concept of the spatial margin of profitability, which denotes the set of locations where revenue exceeds production costs sufficiently to make the activity profitable. Firms with limited information or limited capacity will choose locations inside this margin that are acceptable rather than mathematically optimal.

Merits

• Introduces realistic behavioural considerations into location theory: organisations differ in their information and decision-making capacities.
• Explains why similar firms may choose different locations because of differences in managerial skill, access to information or governance structures.
• Provides a practical viewpoint for policy: improving information systems or building decision-making capacity can shift locational outcomes.

Criticisms and limitations

• The framework is conceptual and can be difficult to operationalise quantitatively without detailed data on information flows and managerial capacity.
• It does not prescribe exact boundaries of the spatial margin of profitability; empirical determination of the margin may be complex.

Applications

Pred's behavioural matrix is useful for planners and firms when assessing how constraints in information and managerial capacity affect investment location. Interventions such as improving market information, providing technical assistance or reducing search costs can expand the set of profitable locations available to firms.

D. M. Smith - Spatial Margin of Profitability

Background and source

• D. M. Smith presented his ideas on industrial location in the book Industrial Location (published in 1971). His model was influenced by empirical studies, including observations of the steel industry in Brazil, and emphasises how variation in both costs and revenues across space determines profitable locations.

Core idea - spatial margin locations

• Smith introduced the concept of a spatial margin of profitability or simply the spatial margin. A spatial margin is the set of locations along a market space where an industry's revenue exceeds its production costs, so that an operation located inside the margin makes profit while one outside the margin suffers loss. The spatial margin depends simultaneously on how costs change with location and how revenue (market access, price, demand) varies across space.

Explanation of the model

• Smith considered a linear market area (for analytical simplicity) where both production costs and revenue vary with distance from markets, input sources, or transport lines. If the revenue curve and cost curve are plotted along space, the region where revenue > cost defines the profitable band or margin. Manufacturing costs differ between situations and locations; consequently, revenue and profit vary within feasible margins. Firms seeking to locate will prefer sites that lie inside the spatial margin of profitability for their particular product and production technology.

Merits

• Emphasises the dynamic interaction between production costs and received revenues in spatial economics.
• Combines both the production (cost) side and the revenue (demand/price) side into a single analytical framework.
• Offers an intuitive geometric representation - profitable bands or margins - that can guide empirical analysis of where firms locate.

Criticisms and limitations

• Assumes linearity and smooth variation of costs and revenues; in reality spatial costs and revenues are often non-linear and discontinuous because of geography, infrastructure and policy.
• Market demand is not uniform; differences in consumer income, tastes, and substitution toward new products mean the revenue side is heterogeneous.
• Supply and demand interact in complex, time-varying ways (entry and exit of firms, technological change), which the simple spatial margin picture does not fully capture.

Applications

Smith's spatial margin concept is useful for empirical location studies, especially in industries where transport costs and market reach change predictably with distance. It is applicable in evaluating site viability, understanding industrial belts and planning infrastructure investments that alter the margins of profitability.

Comparative remarks and critical appreciation

Comparisons

• Objective: Lösch centres on profit maximization under monopolistic competition; Weber focuses on least-cost location under perfect competition. Pred introduces behavioural constraints; Smith formalises the spatial margin concept.
• Role of demand: Lösch explicitly incorporates the magnitude of demand and market area; Smith treats revenue variation across space; Pred emphasises how information about demand and capacity to act upon it matter.
• Realism: Pred and Smith add behavioural and empirical realism that Lösch's geometric model simplifies. All three models, however, rely on simplifying assumptions to make analysis tractable.

Overall critical appreciation

These theories taken together advance understanding of industrial location beyond a single-factor cost model. Lösch's profit maximization introduced the importance of market structure and demand in shaping spatial patterns. Pred highlighted that information and managerial capacity knit into real decision processes and explain departures from optimality. Smith's spatial margin approach provides a tractable way to combine cost and revenue considerations in space. Nevertheless, all models are limited by simplifying assumptions such as homogeneous space, linear cost functions and uniform demand; empirical work must therefore adapt the core ideas to local heterogeneity, institutional constraints and dynamic market changes.

Practical implications for firms and planners

• Firms should evaluate both revenue potential and total location-specific costs, not only transport or wage costs, when selecting sites.
• Improving access to reliable locational information and strengthening decision-making capacity (skills, governance) can expand the set of profitable locations available to firms.
• Regional planners can use spatial margin concepts to identify areas where infrastructure investments (roads, ports, electricity) would shift margins and attract industry.
• Policy measures (incentives, training, market information systems) can reduce information asymmetries and allow smaller firms to enter profitable margins previously inaccessible to them.

Summary

The location theories of August Lösch, Allan Pred and D. M. Smith complement one another. Lösch provides a profit-oriented spatial geometry of firm location under monopolistic competition. Pred adds behavioural realism by showing how information and capacity condition locational decisions. Smith formalises the spatial margin of profitability, the band of locations where revenue exceeds cost. While each theory has simplifying assumptions, together they form a useful foundation for understanding, analysing and influencing the spatial distribution of industry.