Location Theory
A. T. Murray, Arizona State University, Tempe, AZ, USA
& 2009 Elsevier Ltd. All rights reserved.
Glossary
Agglomeration Economies Reductions in costs are
possible by locating near-similar or related industries.
Co-location Two or more businesses (or industries)
positioned next to or near each other.
Hierarchy Spatial arrangement of towns (or goods
and services providers) where high-order items are
found in select, larger places and low-order items in all
places.
Market Area Geographic footprint representing the
subregion where a good or service is consumed.
Optimum Location Geographic site(s) minimizing (or
maximizing) a stipulated utility function or criteria.
Range Maximum distance that people will travel to
consume a good or service.
Spatial Equilibrium Arrangement of businesses
where each maintains a necessary threshold of
customers.
Threshold Minimum market (or consumer base)
needed to support a business.
Introduction
Location theory has long been a central component of
economic geography, involving part explanation and
part prediction regarding the location and interaction of
people, goods, and services in both the private and public
sectors. The explanation component arises when ques-
tions of ‘why’ and ‘how’ spatial patterns of activity have
evolved over time. The prediction aspect comes about
when certain knowledge is used to place, site, relocate, or
otherwise plan for future service provision.
Location theory is the basis and/or context for
studying how and why location decisions are made, either
by companies, government agencies, or people, as well as
provides the rationale for siting decision making and
service allocation. This can involve the examination
of access to goods and services, economic efficiencies,
transportation considerations, service provision, etc.
Classic work, as will be detailed below, has focused
explicitly on land use and transportation costs, primarily
in product manufacturing and delivery. More recent
work in location theory builds upon this, but also has
been broadened to address a range of issues, including
assumptions made, model abstraction, computational
complexity, as well as others. Given insights and strate-
gic goals, location theory serves as the foundation for
270
siting decision making and/or resource allocation, where
modeling approaches are operationalized to support fa-
cility placement and service planning efforts.
Location theory is operationalized, or used in prac-
tice, through location analysis. While not the focus of this
article, there are many methods that support location
analysis, and briefly we note the three following types:
(1) exploration of spatial information and spatial inter-
action, (2) descriptive assessment, and (3) normative (or
prescriptive) decision making. At the most basic level,
geographic information systems (GISs) and/or other
cartographic mapping approaches can be used to explore
spatial information associated with an urban or regional
system of interest. This might involve qualitative as-
sessment through mapping coordinates of entities (spatial
objects), as well as the overlay of related spatial infor-
mation, and could also entail a spatial examination of
interacting flows (e.g., journey-to-work travel, market
areas, migration, etc.). Moving toward greater quantifi-
cation is the formal description of spatial arrangements.
Examples of such descriptive methods include fitting
distance decay functions, deriving location quotients,
assessing excess commuting, among many others. Finally,
there is the process of identifying the best locations and/
or service patterns, which is known as the normative (or
prescriptive) component of location analysis. Normative
approaches have been used to plan for and site new fire
stations, distribute emergency warning sirens, locate new
retail outlets, align oil/gas transmission corridors, con-
solidate schools, and many others. Both the descriptive
and normative elements of location analysis have tradi-
tionally been supported by quantitative methods and
models, an overview of which is discussed elsewhere in
this encyclopedia.
Explanation
In many ways location theory is the outgrowth of various
aspects of economic theory, where encountered nuances
like spatial heterogeneity, neighborhood effects, and
human behavior and decision making were sought to
be more fully understood. The foundations of location
theory are generally regarded as including a focus on
land use, industrial production, central places, and spatial
competition. In fact, typically one person is attributed the
progenitor of the major ideas and concepts for each.
Specifically, the following are those individuals and their
corresponding contribution area: land use – Johann von
Thünen (1783–1850); industrial production – Alfred
 Location Theory 271

Weber (1868–1958); central places – Walter Christaller
(1893–1969) and August Lösch (1906–45); and spatial
competition – Harold Hotelling (1895–1973). In what
follows, an overview of each area is presented, high-
lighting some basic principles and assumptions.
Land Use
Observations regarding land use were fundamental to the
location theory work of Thünen. Of particular interest
was that agricultural land uses changed in systematic
ways relative to the central market serving an area. The
explanation for this systematic organization of space was
economic in the sense of revenue potential. Given the
price of land, costs for labor/inputs, and the associated
distance to transport the harvested (or manufactured)
product to the central market, it simply was not feasible
for certain land uses to be too close to the central market.
Whether a particular good warranted closer proximity to
the central market depended on the price that could be
obtained, less the costs involved to produce and transport
it (land, labor, transportation, etc.).
The basic organization of a land use system observed
by Thünen is summarized in Figure 1. These so-called
concentric circles reflected the general pattern of land
uses at the time. What was most significant about this
spatial organization is that there was an economic in-
terpretation to the pattern. In particular, the price of
land, or the land rent, was higher closer to the city center
(the urban-industrial area). Taking into account that
production/operating costs (including labor), transpor-
tation costs, and land rent all dictate what one would
have to sell the product for to either break even or make
a profit. Given high land rents in urban areas, as an ex-
ample, it likely would not make economic sense to grow
rye in the city center as the product income would not be
sufficient to make a living. The relationship between land
rent and distance from the city center for a product (rye
in this case) is simplified in Figure 2, reflecting the
higher land rent closer to the city center. The sales price
of rye would need to be higher if it were grown closer to
the urban center, but could be lower if the rye is grown
further away because of lower land rents (in addition to
increased transportation costs). Different products have
different land rent curves, thereby serving as an organ-
izing principle for various (competing) land uses.
The observations of Thünen are clearly based on a
number of simplifying assumptions. One is that an isol-
ated state is assumed, where there is one market having
no outside interactions (trade). Another assumption is
that there are homogeneous land characteristics, where
the land surrounding the market is entirely flat with

Urban-
industrial

Intensive agriculture

Extensive agriculture

Ranching

Waste

Figure 1 Land use system.

272 Location Theory
uniform fertility and absent of transportation infra-
structure, or rather that transportation is possible from
anywhere to anywhere in any direction. With respect to
human behavior, it is assumed that a farmer is interested
in profit maximization.
The significance of the work of Thünen is that there is
some rationale to spatial organization, and economics
play an important role. While one can take issue with
the simplifying assumptions made (and many have), the
observed principles remain. Much current research
continues on land use, examining organizing features,
extending economic insights and relationships, and ex-
ploring formal approaches to model land use change.
Industrial Production
The major contribution of Weber to location theory was
his work on industrial production. Of particular interest
was where an industry (or firm) would locate in a region
given material (and product) transportation costs, labor
costs, and agglomeration economies. An important facet
of Weber’s work was formalizing how the optimum lo-
cation could be identified when cost of transportation was
Location
rent
Rye
Distance
Figure 2 Land rent curve.
Input
Factory
Input
Figure 3 Transportation cost factors in industrial location.
minimized. Weber simplified the problem as follows:
given two locations from which raw materials (inputs)
are obtained and one location (market) where the fin-
ished product is to be taken, find the optimal site for
locating the industry (or factory). This basic problem is
illustrated in Figure 3. For each given location (inputs
and market), we know the quantity of materials to be
moved and costs to transport are a function of the dis-
tance to be traveled.
While others are also credited with their work on this
problem (Battista Calieri, 1598–1647; Pierre de Fermat,
1601–65; Evarista Torricelli, 1608–47; in particular), it
was the formal and rigorous treatment by Weber in 1909
with respect to industrial location that is noteworthy. As
illustrated in Figure 3, the transportation cost in this case
is a function of the straight line (or Euclidean) distance
and the amount of material transported, or rather a
weighted travel distance. The optimum location relative
to material transport is the point that minimizes this total
cost. Such a point represents a spatial equilibrium, and is
the most efficient placement of an industry with respect
to transportation costs. To solve such a problem, one
could consider each known location (inputs and market)
as representing a force vector. A known location exerts a
pull on the optimal location relative to the quantity of
materials to be transported over some distance. With the
three locations each exerting such a force, the point
where the forces equal represents the optimal location.
That is, an equilibrium state is reached such that no force
vector is greater than the others. This location, producing
an equilibrium state, is the location where total trans-
portation costs are minimized, thereby making it the
optimal location. This point could be found using a
mechanical model called a Varignon frame. It turns out
that a mathematical approach exists as well for solving
this problem, basically that of Weiszfeld in 1937, but will
not be further detailed here.
Market

As noted previously, labor costs and agglomeration
economies were also of interest to Weber, and were seen
as important facets of industrial production. Both issues
were observed to be factors that could influence the
optimal location of an industry, but were given less sig-
nificance than the transportation cost factor. Of course if
labor costs are relatively uniform, then there would be
no influence. If they are not uniform, then a trade-off
between transportation costs and labor costs must be
addressed. This is much the case with economies of ag-
glomeration, where some reductions in costs are possible
by locating near similar or related industries. However,
this too is a situation where there would be trade-offs
with transportation and labor costs.
The work of Weber relied on many assumptions, ei-
ther explicit or implicit. The more obvious were that raw
material locations are given (known in advance) and the
location and size of markets is given (known in advance).
Relative specifically to transport cost, there is a reliance
on transportation being a function of Euclidean distance.
Beyond this, there was no competition and uniformity
in culture, economic system, and political regime is as-
sumed. There are additional assumptions regarding labor
and agglomeration as well.
Of significance in the work of Weber on industrial
production is formalizing the concept of transportation cost
minimization, and establishing principles for identifying
an optimum location. Also, recognizing potential trade-offs
between transport costs, labor costs, and economies of
agglomeration were fundamental to location theory. Much
research has been devoted to these themes, exploring their
significance and expanding upon them. Ultimately one is
left with direct connections to spatial efficiency, and
equilibrium, in the location of industries, a notion that is
similar to derived aspects of economic theory.
Central Places
The location theory contributions of Christaller in 1933
with respect to central places are well recognized, as is
the work of Lösch in 1940. This work was interested in
describing the relationship between central places (cities
and towns) and the hinterlands they served. Of course
such relationships are the result of urban evolution. In
this regard, ordering principles of consumed goods and
services were observed and described as hexagonal pat-
terns, with cities and/or towns being in the center of
associated hexagons. While Thünen was interested in the
spatial organization of land uses, the focus of central
places was on the distribution and/or use of goods and
services. A good, say clothing, is produced and made
available in a city, as an example. The demand for this
good will be a function of its price and the travel cost for
a consumer to purchase it. For a company to survive, and
earn a living, it must sell its product. This means that
Location Theory 273
some sustainable level of consumption of the good must
be maintained. Given this, two important concepts em-
anate from the theoretical work of Christaller (and
Lösch): threshold and range. The threshold of a good or
service is the minimum market (total consumption) that
is needed to bring a new firm (or producer or service
provider or city) into existence and keep it operating.
The range of a good is the maximum service distance
that people will travel to buy that good or service. Both
threshold and range reflect an explicit focus on demand
for a good or service. These concepts can be further
understood through the depiction of range in Figure 4,
where the location of the business is shown (center) and
the maximum travel range is indicated. This area, a circle
in this case, reflects a potential trade area of businesses
based upon the range. For the business to survive it must
have sufficient demand for its product within this area. If
it does not, the business will cease to exist. From a spatial
perspective, the threshold should be achieved before the
range is reached, if a business is to be viable.
At a broader spatial scale one is likely to see the
emergence of patterns relative to range and threshold,
and such patterns for a single good or service across a
region are expected to be in the form of hexagons, as
shown in Figure 5. Thus, a particular good or service
would see a pattern similar to that shown in Figure 5
under certain conditions, and underlying this are the
associated ranges and thresholds because the independ-
ent businesses would not continue to exist unless each
maintained the minimum customer base needed to make
a living. The hexagonal pattern emerges because a viable
business will maintain its customer base (threshold)
within the product range and over the long term such
Range
Figure 4 Product range.
274 Location Theory
(a)
Figure 5 Hexagonal market area pattern.
patterns represent equilibrium states, reflecting a sus-
tainable number of businesses in a region.
Another facet of central places is the notion of hier-
archies. If this is viewed in terms of towns/cities, what we
would see across a landscape are different-size cities, not
similarly sized as shown in Figure 5. Thus, there are
small, medium, and large cities, and those in between as
well, but in addition to the patterning in Figure 5 there
are hierarchical relationships that exist between these
cities. In general, with respect to cities, larger centers
offer more goods and services, so the range for these
items may be larger. This means that smaller cities are
offering less variety, and focus on more regularly used (or
low-order) goods and services. These more regularly
used items are found in nearby larger cities as well, but
the transportation costs to acquire them are prohibitive.
Beyond this, sufficient demand exists for such goods and
services in local areas (suburban or rural), meaning a
necessary minimum threshold level of demand exists and
it is priced reasonably compared to the price in a larger
city that is further away (including transportation costs).
Examples of high-order goods and services found in
larger cities might include government functions, farm
equipment, higher education, specialized health care, etc.
The work on central places is not devoid of any
underlying assumptions, and some of the previously
noted issues are relied upon here as well. An obvious
assumption in the hexagonal pattern is that consumers
are minimizing distance with respect to transportation
costs, and perceive the offered goods/services as
equivalent. That is, a consumer will go to the closest
center (or town), so there behavioral preference is ex-
ercised. On the business side, it is assumed that they seek
the most advantageous locations. There are assumed
economies of scale in operations related to system hier-
archies as well. As with previous work in location theory,
researchers have taken issue with these and other relied
(b)
upon assumptions. Thus, work has continued to extend
the theory in a number of ways.
The significance of the work on central places relative
to location theory is the prevailing factors of market
areas, namely range and threshold. These characteristics,
along with consumer and business behavior, ultimately
result in emerging spatial patterns. Over time a spatial
equilibrium emerges, and under certain conditions such
patterns will be in the form of hexagons.
Spatial Competition
A final area of location theory is a focus on spatial
competition, for which the contributions of Hotelling in
1929 are generally noted. Much of the previous work on
land use and industrial production assumes some aspect
of locational independence. However, spatial competition
recognizes that an advantage can be gained by where one
locates (or does not locate), creating a state of dis-
equilibrium. After all, businesses are in competition for
customers. Of note in the work of Hotelling was an ex-
ample along the lines of that shown in Figure 6. Here,
two hot dog vendors are operating along the shown
street. The question is where is the best place to locate
given a competitor on this street (knowing that the other
vendor can also locate anywhere on the street). However,
the issue of pricing is also a factor. Assume two given
locations, market share can be manipulated by reducing
the cost of the product, hot dogs in this case. By lowering
the cost, more market share is possible. However, for the
business to be viable for both vendors, a price equi-
librium will be achieved and it will be above the cost to
run the operation. With respect to location, it was shown
that the best place to locate was in the middle. In doing
so, under idealized conditions it would ensure the vendor,
say cart 1, of at least half of the total market. Half of the
market is secured if both vendors are located halfway

Figure 6 Two-vendor location along a linear market.
down the street next to each other (back to back in a
linear market with uniformly distributed demand where
people patronize the closest vendor). If the other vendor
(cart 2) was located away from the middle, then the other
vendor (cart 1) could gain additional demand purely on
the basis of locational advantage. That is, the vendor in
the middle (cart 1) would maintain half of the total de-
mand on the street plus half of the demand between the
other vendor. Of course both vendors would eventually
recognize this. Thus, at equilibrium both vendors would
be next to each other, or co-located, as this would ensure
each an equal market share.
The work on spatial competition is an obvious attempt
to deal with the complexities of businesses. A central
issue in spatial competition is that the optimal location is
not solely a function of cost minimization, but also takes
into account demand (or market area) factors. Further,
businesses must contend with game theoretic behavior,
and such behavior (and associated costs) has implications
for product pricing and market share. As with previous
work, there are assumptions being relied upon. The
simplified example highlights this point, but important
insights are gained, forming at least part of the broader
underpinnings of location theory.
Extensions
As noted previously, the above work has relied on as-
sumptions and simplifications to derive a theoretical basis
for understanding land use, industrial production, central
places, and spatial competition. Many researchers have
devoted considerable effort to extending efforts in these
areas, relaxing assumptions and putting into practice
these theoretical underpinnings. Well recognized names
contributing to location theory include Melvin Green-
hut, Walter Isard, Brian Berry, Martin Beckmann, but no
doubt many others could be mentioned as well.
Prediction
Much of the noted location theory thus far relates to
fairly explicit connections to economic theory. No
overview of location theory could be devoid of
Location Theory 275
recognizing other related advances associated with the
formalization of basic ideas and/or mathematical ab-
stractions, both of which have contributed to the ability
to predict patterns and/or locate future services.
The work by Alan Wilson formalizing spatial inter-
action approaches has been key for identifying market
areas. Leon Cooper is noteworthy for his work on mod-
eling multiple facility siting, extending the basic problem
posed by Weber. This is known as the location-allocation
problem. Louis Hakimi raised the issue of a more
structured spatial environment, recognizing the limits
imposed by actual transportation networks. These mod-
eling variants are known as the p-center and p-median
problems. Further, Hakimi established optimality con-
ditions associated with location on a network. Charles
ReVelle is recognized for his work on coverage modeling,
where concepts of range are explicitly addressed as a
mathematical abstraction of location. The two most well
known of these modeling approaches are the location set
covering problem and the maximal covering location
problem.
Issues
Location theory contributes significantly to understand-
ing important current issues and helping develop plans to
serve social needs and/or promote economic growth. It
underlies effective emergency service plans, like locating
hospitals, fire stations, warning sirens, etc. Location the-
ory also enables competitive services to be evaluated and
explored, prior to siting the business or outlet. As an
example, how will a market for a particular good respond
if a new business is located in a particular place, and what
will be the response of competitors. A final current
context for which location theory is invaluable is exam-
ining environmental sustainability issues, like minimizing
local impacts and determining how many activities (or
species) are viable in an area.
More contemporary issues and contributions to lo-
cation theory involve addressing context, complexity, and
representation of geographic space. The context issue
is varied, including concerns regarding the phenomenon
of interest varying across space, such as public equity,
276 Location Theory
private industry objective, utility specification, con-
straining conditions, etc. By complexity we include issues
of parameter fitting and interpretation in the context
of spatial interaction, as well as model solvability.
Finally, with respect to representation there are issues of
how to represent space, either as objects (and which ones
are important), whether data aggregation should be ap-
plied, how to represent spatial relationships like con-
nectivity and proximity, and appropriateness of scale of
analysis.
Perhaps the greatest implications for location theory
and its further evolution are GIS, and geographic infor-
mation science (GIScience) more generally. Effectively,
more detailed information is available and accessible due
to GIS maturation as a product and an industry. This has
invariably raised questions about underlying assumptions
related to location theory, but also has led to questions
regarding what can be done and how this should be
approached from a mathematical abstraction point of
view.
See also: Spatial Analysis, Critical; Spatial Interaction
Models.
Further Reading
Beckmann, M. (1968). Location Theory. New York: Random House.
Church, R. L. (1999). Location modelling and GIS. In Longley, P.,
Goodchild, M., Maguire, D. & Rhind, D. (eds.) Geographical
Information Systems (2nd edn.), pp 293--303. New York: Wiley and
Sons.
Dicken, P. and Lloyd, P. E. (1990). Location in Space (3rd edn.). New
York: Harper and Row.
Isard, W. (1956). Location and Space Economy. Cambridge, MA: MIT
Press.
Miller, H. J. (1996). GIS and geometric representation in facility location
problems. International Journal of Geographical Information Systems
10, 791--816.
Murray, A. T. (2005). Geography in coverage modeling: Exploiting
spatial structure to address complementary partial service of areas.
Annals of the Association of American Geographers 95, 761--772.
Puu, T. (2003). Mathematical Location and Land Use Theory (2nd edn.).
Berlin: Springer.
Smith, D. M. (1981). Industrial Location (2nd edn.). New York: Wiley.