Industrial configuration in an economy with low transportation costs

Abstract

We examine how the spatial economy with multiple industries is shaped when interregional trade costs and intraregional commuting costs are low. All industries are characterized by increasing returns to scale and monopolistic competition, and they are differentiated by their trade costs and the degree of intra-industry competition measured by their firm numbers. We find some distinct rules in industrial location. First, at most, one industry disperses, while others agglomerate in a region according to their ratios of relative trade costs to firm numbers. Second, industries with stronger competition constitute a smaller region, while those with higher trade costs compose a larger region. The results are consistent with the classical Weberian location theory and suggest that the degree of intra-industry competition also becomes an essential factor to determine industrial location when transportation costs are small. Finally, the population differential between the regions monotonically decreases in the relative commuting cost.