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Agglomeration Economies

Agglomeration Economies. Chapter 5. To cluster or not to cluster?. a.k.a: external economies; cluster economies Agglomeration Economies: lower production costs attract clusters Diseconomies of agglomeration: very large clusters repel economic activity. Types of Agglomeration Economies.

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Agglomeration Economies

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  1. Agglomeration Economies Chapter 5 1

  2. To cluster or not to cluster? • a.k.a: external economies; cluster economies • Agglomeration Economies: lower production costs attract clusters • Diseconomies of agglomeration: very large clusters repel economic activity 2

  3. Types of Agglomeration Economies • Localization Economies decrease the cost of production for every firm in a specific industry. • Urbanization Economies decrease the cost of production for every firm that locates in a particular city regardless of industry. 3

  4. Benefits of clusters • Clusters may increase product demand, allowing firms to benefit from internal economies of scale. • Marshalian externalities from clusters: • Pools of specialized labor • Specialized firms • Technological spillovers 4

  5. Localization Economies • Pools of specialized labor • Easy to poach labor from competitors • Specialized training exists • Formal/informal communication (Saxonian) 5

  6. Localization Economies • Specialized resources • Backward linkages (upstream products) (supplier of inputs) • Forward linkages (downstream products) (buyer of output) • Face to face communication • JIT • Producer services (outsourcing) • Capital markets/bankers understand that industry 6

  7. Localization Economies • Technological spillovers (technological externalities) • Stimulate innovation • Often created from poached labor 7

  8. Urbanization Economies • Advantages connected with the size of an urban area regardless of industry. • Specialized labor: • Law of large numbers: lower unemployment rate if workers are willing and able to change industries. • More special services than in rural areas. 8

  9. Urbanization Economies • Specialized resources • Urban vs Rural Infrastructure • Large city projects less risky to finance • Technological spillovers • Novelty by combination from great variety of goods in a city. 9

  10. Perfectly competitive firm in long-run equilibrium 10

  11. Imperfect competitor with normal profit 11

  12. Technical average cost and total average cost curves of imperfect competitor 12

  13. Appendix: Location under Uncertainty 13

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  17. Minimax Regret 17

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