Bid rent theory
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The bid rent theory is a geographical economic theory that refers to how the price and demand for real estate changes as the distance from the Central Business District (CBD) increases. It states that different land users will compete with one another for land close to the city center. This is based upon the idea that retail establishments wish to maximize their profitability, so they are much more willing to pay more money for land close to the CBD and less for land further away from this area. This theory is based upon the reasoning that the more accessible an area (i.e., the greater the concentration of customers), the more profitable.
Explanation
Land users all compete for the most accessible land within the CBD. The amount they are willing to pay is called "bid rent". The result is a pattern of concentric rings of land use, creating the Concentric zone model.
It could be assumed that, according to this theory, the poorest houses and buildings will be on the very outskirts of the city, as that is the only place that they can afford to occupy. However, in modern times this is rarely the case, as many people prefer to trade off the accessibility of being close to the CBD, and move to the edges of the settlement, where it is possible to buy more land for the same amount of money (as Bid Rent states). Likewise, lower income housing trades off greater living space for greater accessibility to employment. For this reason low income housing in many North American cities, for example, is often found in the inner city, and high income housing is at the edges of the settlement.
Agricultural analogy
Though later used in the context of urban analysis, though not yet using this term, the bid rent theory was first developed in an agricultural context. One of the first theoreticians of bid rent effects was probably David Ricardo, according to whom the rent on the most productive land is based on its advantage over the least productive, the competition among farmers ensuring that the full advantages go to the landlords in the form of rent. Later, this theory was developed by J. H. von Thünen who combined it with the notion of transport costs. His model implies that rent at any location is equal to the value of its product minus production costs and transport costs. Admitting that transportation costs are constant for all activities, this will lead to a situation where activities with the highest production costs are located near to the market place. Those with low production costs will be farther away.
The concentric land-use structure thus generated closely resembles the urban model described above: CBD - high residential - low residential. This model, introduced by William Alonso, was inspired by von Thünen's model.[citation needed]
Bid rent theory in the Central Business District (CBD)
Land users, whether they be retail; office; or residential, all compete for the most accessible land within the CBD. The amount they are willing to pay is called bid rent. This can generally be shown in a ‘bid rent curve’. Based upon the reasoning that the more accessible the land, generally in the centre, is the more expensive land.
Commerce (in particular large department stores/chain stores) is willing to pay the greatest rent to be located in the inner core. The inner core is very valuable for them because it is traditionally the most accessible location for a large population. This large population is essential for department stores, which require a considerable turnover. As a result, they are willing and able to pay a very high land rent value. They maximise the potential of their site by building many stories.
As one goes farther from the inner core, the amount commerce is willing to pay declines rapidly.
Industry, however, is willing to pay to be in the outer core. There is more land available for their factories, but they still have many of the benefits of the inner core, such as a market place and good communications.
As one goes farther out, the land becomes less attractive to industry because of the reducing communication links and a decreasing market place. Because householders do not rely heavily on these and can now afford the reduced costs (when compared with the inner and outer core),they can purchase land. The further from the inner core and, the cheaper the land. This is why inner city areas are very densely populated (terraces, flats and high rises), whilst the suburbs and rural areas are sparsely populated (semi and detached houses with gardens).
Sources
- Location and land use, 1964, by William Alonso.
- "Essential AS Geography", 2000 By Simon Ross, John Morgan and Richard Heelas