A model of product differentiation in which the producers are located in a single- or multi-dimensional characteristics space, with consumers’ locations, i.e. their ideal points of consumption, distributed over this space. In particular, this could be a physical space, with the distance from a consumer, and related transportation cost, being the characteristic of the product. Examples are the linear city and the circular city models. In spatial models each firm competes for customers only locally, that is, only with firms offering similar products. A particular case is spatial monopoly. See also gravity model; spatial price discrimination.
Reference: Oxford Press Dictonary of Economics, 5th edt.