Agglomeration as spatial interdependence between firms and households (Q1071630)

Agglomeration of economic activities over space is an important issue, especially in modern economies where cities become a dominant mode of spatial organization. The purpose of this paper is to provide a rationale for this phenomenon in the case of two densities, firms and households, which are distributed over a linear, discrete space. Households are attracted to places where the density of firms is high because opportunities there are more numerous; and they are repulsed by places where the density of households is high because they dislike congestion. Firms are attracted to places where the density of consumers is high because there the expected volume of business is large; and they are repulsed by places where the density of sellers is high because of the stronger competition prevailing there. Hence the spatial distribution of both classes concerns everyone in this economy. Such complete interdependence may support a state of spatial equilibrium, one where there is a uniform distribution of opportunities between members of the same class. The nature of such equilibrium is not obvious because, in our model, all agents are subjected to both agglomerative and deglomerative forces, and are involved in a spatially interdependent system. We prove that a spatial equilibrium exists and that it is an agglomeration for both firms and households, i.e. both densities decrease away from the centre. Agglomeration emerges through the interplay between spatial boundaries, trip dispersion and the existence of positive profits.