• Bid Rent Theory Definition

  • William Alonso's Bid Rent Theory

  • Bid Rent Theory Assumptions

  • Bid-Rent Theory Example

  • Strengths and Weaknesses of Bid Rent Theory

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Bid Rent Theory: What Is It & Examples

Picture yourself in the near future: with the assistance of ExamUp, you aced your AP Human Geography exam and secured admission to a prestigious university. As a first-year student, you have the option to live off-campus and have been exploring apartments in search of a vibrant neighborhood with plenty of shops and restaurants.

However, the high prices have led you to consider more affordable options, even if it means sacrificing some of the city's retail experiences. So, why are these apartments so costly? This phenomenon can be explained by bid rent theory.

By examining Seattle as a case study, we will delve into the definition of bid rent theory, its assumptions, and its strengths and weaknesses to determine its validity.

Bid Rent Theory Definition

Bid rent theory offers insight into the internal structure of cities.

Bid rent theory: The cost of land, property, or rental units increases as one approaches a city's central business district.

Building upon established urban patterns, bid rent theory highlights:

  • The presence of a central business district (CBD) for commercial activities
  • An industrial district for manufacturing
  • Residential districts on the outskirts

The CBD serves as the city's hub, often referred to as downtown or the city center. It typically evolves from a historic town center and attracts a high population density due to its concentration of commerce, social opportunities, and urban amenities.

Within the CBD, a positive feedback loop emerges where population density and commerce mutually reinforce each other. Businesses thrive in this area due to the dense population, leading to higher profits and increased desirability of residential and retail spaces. This dynamic drives up prices, encapsulating the essence of bid rent theory.

It's important to note that "rent" in bid rent theory pertains to revenue after deducting production and transportation costs, rather than monthly apartment expenses. However, the two concepts are interconnected, as higher rental costs often signify a desirable and densely populated area.

The farther you get from the CBD, the less competition you face for land use. This is because:

  • The prevalence of commerce will decrease as businesses seek to maximize profits by locating in densely populated areas.
  • Residents find less densely populated areas less appealing due to reduced social opportunities.

The expenses associated with transportation, including time and money, overshadow the advantage of cheaper housing options located beyond the Central Business District (CBD), leading to a reduction in bid rent compared to the CBD.

The bid rent theory suggests that cities will naturally develop zones based on building function, leading to a separation of industry and commerce within the city.

William Alonso's Bid Rent Theory

William Alonso (1933-1999) was an urban planner and economist credited with developing the bid rent theory.

Originally from Argentina, Alonso moved to the US in 1946 and later authored Location and Land Use: Toward a General Theory of Land Rent in 1964, a pioneering work in explaining urban rent costs.

Alonso's ideas regarding land utilization and bid rent theory were subsequently employed in agricultural geography to explain the geographic pattern of intensive and extensive agriculture.

Bid Rent Theory Assumptions

Alonso's bid rent theory is based on several assumptions about the internal structure of cities:

  • Cities will generally have distinct and recognizable districts, notably a centralized business district.
  • The CBD will inherently be the most desirable area for a majority of people.
  • Transportation costs remain consistent across the city, meaning that costs are lower for trips within the CBD than for journeys from the residential area to the CBD due to the shorter distance between them.
  • Profit/affordability proportional to population density is the single greatest determining factor for the desirability of a location for commerce.

Bid rent theory presents an urban layout that is in many ways very similar to the Concentric Zone Model or the Hoyt Sector Model. Many of these assumptions do hold true in many cases, but we will discuss the strengths and weaknesses of the bid rent theory a bit later.

Bid-Rent Theory Example

Evaluating the importance of the bid rent theory relies heavily on analyzing various common patterns in Seattle, Washington. All prices are indicated in US dollars.

Using the parameters as defined in this map as of November 2022:

  • Single-bedroom apartments in the heart of the CBD ranged from $3200 to $3700 per month
  • Retail space in and around the CBD (including the Pike Market retail area) ranged from around $32 to $70 per square foot per year
  • Office space in and around the CBD ranged from $25 to $55 per square foot per year

Proceeding a bit more to the southern area is Seattle's formal industrial district, home to the headquarters of numerous corporations such as Starbucks and Uwajimaya, alongside being a significant hub for industrial structures. Southern Downtown ("SODO") will be considered part of the industrial district for this exercise.

Again, as of November 2022:

  • Studio apartments in SODO varied in price from $1700 to $2200 per month; there are almost no residences nearer to the industrial center.
  • Retail space in and around the industrial centre ranged from $20 to $25 per square foot per year, but was very limited relative to the CBD
  • Office/warehouse space in and around the industrial district was around $20 per square foot per year

Thus far, everything is going well: the bid rent theory remains valid. Now, let's analyze prices in a residential district of Seattle.

West Seattle is mostly a mishmash of different residential neighbourhoods with some limited retail/commerce services. As of November 2022:

  • Single-bedroom apartments in West Seattle ranged from $1400 to $3500 per month; many apartments available
  • Retail space in and around West Seattle was around $27 to $31 per square foot per year
  • Office space in and around the industrial district was around $15 to $35 per square foot per year

In this case study, we can observe that in Seattle, the prices of residential, office, and retail spaces are higher around the Central Business District (CBD) compared to the industrial district or the West Seattle residential district.

This indicates that Seattle follows the bid rent theory, where prices are elevated in the CBD due to its perceived desirability for both commercial and residential purposes.

Strengths and Weaknesses of Bid Rent Theory

The bid rent theory is a simple and intuitive concept that can be observed in everyday life, such as when looking for apartments or shopping in downtown areas. However, despite its practicality, the theory has several weaknesses that need to be considered.

One weakness of the bid rent theory is its inability to account for the impact of online shopping on retail activity. The rise of e-commerce has disrupted the traditional relationship between physical location and profit margins, challenging the importance of population density in determining a retail business's success.

As online commerce continues to grow, the competition for physical retail space in central business districts may decrease, potentially altering long-term residential population distributions.

Additionally, the bid rent theory's assumption about the organization of cities may not always hold true. While some cities, like Seattle, align with the typical pattern of a central business district, industrial district, and residential districts, others, such as Tokyo, Japan, have multiple central business districts.

Furthermore, cities like Chesapeake, Virginia, may lack a distinct central business district, especially in areas that have developed from suburbs. In these cases, the applicability of the bid rent theory is limited.

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