Lösch’s Theory of Economy and Location
(Also known as the Revenue Maximization Model)
🧠 Context and Background
🔹 August Lösch, a German economist, gave this theory in 1954 (much after Weber) in his book “The Economics of Location”.
🔹 Unlike Weber, Lösch did not idealize the world with perfect conditions like isotropic surface or perfect competition.
Instead, he said:
“Perfect competition is hardly found in real life; in fact, monopoly or imperfect competition is more common.“
Hence, instead of asking “Where can I minimize my costs?”, Lösch asked:
“Where can I maximize my revenue and profit?“
And that’s the core of his theory.
🧮 Key Assumptions and Concepts
Let’s decode the heart of his theory in simple points:
1. Focus on Profit Maximization
Weber = Minimize cost
Lösch = Maximize revenue
👉 Profit = Revenue – Cost
Lösch argued that most firms are actually more focused on earning more than simply spending less.
2. Market is Central to Location Decisions
Lösch observed that:
- The market is the place where demand is highest.
- Therefore, the closer an industry is to its market, the more it can sell.
- Transport cost for consumers is reduced → higher purchasing ability → higher sales volume.
Thus, industries would naturally tend to locate near the market to:
- Serve more consumers,
- Earn more revenue, and
- Maximize profits.
✅ For example:
- Bakery, dairy, newspapers—these are all located near their consumers.
- Even perishable goods industries or consumer goods often follow this logic.
3. Revenue Determines Location, Not Production Cost
Weber’s model was supply-driven. It focused on:
- Where is the raw material?
- Where is labour cheaper?
- How to reduce transport cost?
Lösch flipped this view and said:
“Location is not influenced by where the cost is low, but by where the revenue is highest.”
He was one of the first economists to bring consumer demand and market structure into location theory.
🧭 Key Contributions of Lösch’s Theory
- Incorporated Market Demand –
Brought in the demand side of industrial location which Weber had ignored. - More Realistic View of Competition –
Replaced Weber’s perfect competition assumption with imperfect and monopolistic competition, which is more common in real life. - Revenue Zones Concept –
Lösch visualized zones of profitability around the market where a firm could operate. As you move away from the center, sales decrease and revenue drops—hence industries stay closer to the demand center.
❌ Limitations / Criticism of Lösch’s Theory
- Neglect of Transport Cost –
He focused so much on revenue and market demand that he almost ignored transport cost—which in many industries is a major factor. - Too Theoretical –
Though logical, Lösch’s model lacks practical application in some industrial sectors—especially heavy industries where production cost dominates. - Doesn’t explain raw-material-oriented industries –
Like sugar, iron & steel, cement etc., which are cost-sensitive and not market-oriented.
📌 Conclusion: Weber vs. Lösch – A Balanced Perspective
| Factor | Weber | Lösch |
|---|---|---|
| Focus | Cost minimization (supply-side) | Revenue maximization (demand-side) |
| Key determinant | Transport & labour costs | Market demand & profit |
| Type of industry explained | Heavy & raw-material-based | Consumer-oriented industries |
| Market Assumption | Perfect competition | Monopolistic competition |
| Weakness | Ignores demand-side | Ignores transport cost |
Both theories are like two sides of the same coin—while Weber explains “where” it is cheap to produce, Lösch explains “where” it is best to sell.