Trade Area

A concept with domestic and international dimensions. From a domestic perspective, a trade area incorporates the geographic proximity (trade zone) of customers and sellers. It is the geographic region from which a town gets most of its customers. From an international perspective, a trade area is normally associated with the economic integration of contiguous countries, known as a free-trade area.

Most retail businesses have a relatively fixed area where customers come from to do business. Businesses in a trade area attract customers from the neighborhood or workers who are employed in the vicinity. Changes in the residential size of the neighborhood or in job [Page 520]availability affect the viability of the selling zone. The trade area for most small businesses is estimated to be about 3 to 5 miles.

A trade area can be defined by traffic flow, zip codes, retail gravity (estimates of the distance customers will travel to buy goods and services after comparing prices, quality, and other relevant factors), and commuting data (to define the boundaries of a trade area). The total market consists of populations in the host community and the population of the surrounding or adjoining towns in the trade area.

Identifying a trade area is important for businesses to understand how they can expand their markets, and it helps city and state policymakers engage in market analysis of the local area by using vital data on the number of customers, projected sales, and demand pull factors.

A free-trade area is a form of economic integration in which members remove trade barriers among themselves but retain the right to impose legal trade restrictions on nonmembers. The North American Free Trade Agreement (NAFTA), the Southern Common Market, and the Economic Community of West African States (ECOWAS) are examples of a free-trade area.

A free-trade area is one of four types of trading blocs. The others are customs union; common market; and economic union. For more information, see Carbaugh (2007), Myles (2003), Pugel (2007), and Salvatore (2006).