Intercity Trade and the Industrial Diversification of Cities

The industrial diversification of cities is explained without imposing linkages among industries. In each of two city-industries, a manufacture is produced competitively as the final good using labor and industry- specific differentiated services. Manufacturers import the services of their industry from all cities that produce them, since their technology favors variety. In specialized cities, the city-industry is large and many services are locally available but the two manufactures have to be traded among cities. In diversified cities the two manufactures are produced in the same city, and each industry crowds out half the local services of the other, but manufactures need not be imported. A lower cost of trading manufactures (e.g. railroads and intercity highways) favors a system of specialized cities, while a lower cost of trading services (e.g. telephone, the Internet) favors a system of diversified cities since the latter cities rely more on imported services, having fewer locally. A larger cost-share of services favors specialization, and high intracity commuting cost and population growth favor diversification.