This dissertation has been — microfilmed exactly as received 67>-16f329 QUINN, Michael Thomas, 1938- SOME EFFECTS OF GEOGRAPHIC PRICE POLICIES ON SELECTED VARIABLES IN THE STEEL AND BELT INDUSTRIES. The Ohio State University, Ph.D., 1967 Business Administration University Microfilms, Inc., Ann Arbor, Michigan SOME EFFECTS OF GEOGRAPHIC PRICE POLICIES ON SELECTED VARIABLES IN THE STEEL AND BELT INDUSTRIES DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Michael Thomas Quinn, B.A., M.B.A. ****** The Ohio State University 196? Approved by 1A)'(Lit- Adviser Department of Business Organization ACKNOWLEDGMENTS I take this opportunity to thank the members of my com­ mittee, who have provided counsel and guidance throughout the writing of this dissertation: Dr. James A.. Black, Dr. Emilio Casetti, Dr. Alvin E. Coons, Dr. Fred E. Kindig, and Dr. Leslie J. King. In addition, I would like to thank my original adviser, Dr. J. L. Heskett, for his many valuable suggestions and the impetus he provided in the early stages of this dissertation. Especial thanks go to Dr. W. Arthur Cullman, whose con­ stant encouragement and Interest have been an Indispensable aid. I wish to acknowledge that I have had free use of the computing facilities of the Numerical Computation Laboratory of The Ohio State University and the Western Data Processing Center at the University of California, Los Angeles. Lastly, I would like to thank Katharine G. Hoch and Kristin H. Quinn for editing and typing assistance so help­ fully provided. ii VITA July 1, 1938 Born - Philadelphia, Pennsylvannia 1959..*..... B.A., Cornell University, Ithaca, New York 1961......... M.B.A., Cornell University, Ithaca, New York 1964-1965.... Teaching Assistant, Department of Business Organization, The Ohio State University, Col­ umbus, Ohio 1965-1967*••• Acting Assistant Professor, Graduate School of Business Administration, University of California at Los Angeles, Los Angeles, California FIELDS OF STUDY Major Field: Business Logistics, Professor J, L, Heskett Minor Field: Economics. Professor C. L. James Quantitative Methods. Professor J. A. Black Mathematics. Professor Jesse Shapiro ill TABLE OF CONTENTS Page ACKNOWLEDGMENT li VITA ill LIST OF TABLES vl LIST OF CHARTS vii LIST OF ILLUSTRATIONS viii Chapter I. INTRODUCTION 1 Purpose Demand for Transportation Services Geographic Price Policies Hypothesis Research Methodology Model Construction Limitations of the Study II. LITERATURE REVIEW.................... 16 Introduction Argument Related Models Theory of the Firm Location Models Optimal Models Trading Models Summary of Related Models iv Chapter III. THE MODEL Introduction Simulation Model Characteristics Important Relationships Sellers' Behavior Buyers' Behavior Experiments Model Equations Solution of Equations Model Inputs Output Sequence of Operations IV. RESULTS 92 Graphical Representation of the Data Effects of the Model Variables Effects of Parameter Changes Transportation Costs and Cross-Hauling Production Costs Baslng-Point Profits Prices Summary of Analysis Summary V. CONCLUSTIONS..................................... 137 Introduction Geographic Demand Stimulation Geographic Demadn Stimulation Factors of the Price Policies Conclusion about Hypothesis Variables Hypothesis Validation Summary of Hypothesis Validation Real World Conclusions Conclusions about Key Model Variables Conclusions about the Model Conclusions about the Use of the Iterative Method Suggestions for Further Work Implications for Business and Government Policy APPENDIX A. 161 APPENDIX B 175 BIBLIOGRAPHY 191 v LIST OF TABLES Table Page 1. Experiment Parameter Settings............... 82 2. Average Distance Between Sellers and Buyers.................................. 95 3. General Rankings of Transportation Costs and Cross-Hauling.................... 112 4. General Rankings of Production Costs........ 120 5. Production Costs.............................. 123 6. General Rankings of Prices........... 134 7. Experiment 1 Data ......... 162-163 8. Experiment 2 Data........................... 164-165 9. Experiment 3 Data............................. 166-16? 10. Experiment 7 Data ...................... I68-I69 11. Experiment 8 Data............... 170-171 12. Experiment 9 Data ....................... 172-173 13. Basing-Point Profits.......................... 174 vl LIST OF CHARTS Charts Pages 1-3 Belt Industry Average Transportation Costs......... 99-101 4-6 Steel Industry Average Transportation Costs............ 102-10^ 7-9 Belt Industry Cross-Hauling............... 105-107 10-12 Steel Industry Cross-Hauling............... 108-110 13-15 Belt Industry Average Production Costs................ 113-115 16-18 Steel Industry Average Production Costs......................... 116-118 19-20 Belt and Steel Industry Average Profits................................... 125-126 21-23 Belt Industry Average Prices.............. 128-130 2^-26 Steel Industry Average Prices............. 131-133 vli LIST OF ILLUSTRATIONS Figure Page 1. A Diagram Showing F.o.b. Mill and Basing-. Point Arguments............................... 21 2. The Model of Hotelling and Chamberlin Showing Positions of Sellers A. and B. on the Linear Market L of Length a+x+y+b......... 25 3. A Graphic Representation of von Thunen's Theory.............................. 29 4. Weber's Location Theory in Terms of Transport and Non-Transport Factors..................... 31 5. A. Construction of Weber's Isotims and Isoda- panes Showing the Interrelated Influence of Transportation and Production Costs on the Selection of a Production Site........ 33 6. The Launhardt-Palander Construction of Transport-Orientation. ................ 35 7. Machlup's Grid Construction Showing the Placement of Four Mills....................... k2 8. A Diagram Showing Production Cost Functions of the Belt and Steel Industries............. 59 9. A Matrix Diagram Showing the Locations of the Buyers and Sellers..................... 6l 10. A. Diagram Showing the Potential Behavior of a Function Given an Initial Price............ 79 11. Main Model Flowchart............................ 86 12. Cost Subroutine.................................. 87 13. Iteration Subroutine............................ 89 14. F.o.b. Subroutine.................. 90 15. A Hypothetical Seller at X and Buyers at A and B for the Demand Stimulation Example 139 viii CHAFTEB I INTRODUCTION Purpose Geographic price policies vary greatly, yet the rela­ tive impact of these policies on sellers' costs, prices and profits has not yet been determined, largely because of in­ sufficient data. The main purpose of this dissertation is, by generating reasonable data on the subject", to study the effects of these geographic price policies on transportation and production costs, cross-hauling, prices and profits. A further purpose is to provide a possible framework for the study of problems having geographic dimensions, such as location of facilities, routing of transportation equip­ ment, and regulation of transportation modes. In so far that distance through product availability affects product dif-. ferentiation, business promotion problems are included. As an independent variable, transportation cost has a direct effect on the development of geographic areas and on the performance of geographic operations. As a dependent variable, actual transportation charges for a buyer vary according to a seller's geographic price policies. There­ fore, transportation cost is the key dependent variable in this dissertation. 2 Demand for Transportation Services There are many factors in an economy which determine the demand for transportation services. This demand is largely a derived demand based on the utility of services to com­ modities. The following factors affect the amount and flow of commodities transported: 1. spatial characteristics of the economy, 2. size and type of economy, 3. governmental policy,'*' These factors, in turn, affect the quantity and quality of transportation services. Spatial Characteristics Spatial characteristics of the economy have a great effect on the. amount and flow of commodities because the spatial array of raw materials, factories, and markets largely determines shipping patterns. For Instance, fac­ tories may locate close to raw materials, perhaps at long distances from dispersed market areas, and may thus require The sources for this section are as follows: C. J. Zwick, Demand for Transportation Services in a Growing Ec­ onomy, P-26&2, Rand Corporat1on~Paper 1, J. L. Heskett, Robert M. Ivie and Nicholas Glaskowsky, Jr., Business Logistics (New York: The Ronald Press Company"] 196*0", Frank H. Mossman and Newton Morton, The Logistics of Dis­ tribution Systems (Boston: Allyn and Bacon, inc., 19&5). and Walter I sard, Location and Space Economy (New York and Cambridge: John Wiley and Sons, Inc., and the Technology Press of the Massachusetts Institute of Technology, res­ pectively, 1956). long shipments from the factories to the markets. If mar­ kets are generally concentrated, factories need not be located near their raw material sources, thus manufacturers may locate close to their markets and transport raw materials instead. In the United States, refineries have been located either close to the sources of crude oil or close to markets for refined products, requiring long shipment of refined pro­ ducts in the first case and crude oil in the second. As ad­ vancing technology changes industrial processes and materials