Production linkages, agglomeration, and spatial organization of production: A monopolistic competition approach
Input users and producers seek to increase their profitability by locating near each other. This self-reinforcing relationship between input producers and users can be views as a basic agglomeration force to enable the modeling of agglomeration economies based on a standard monopolistic competition model without making strong a priori assumptions. First, we develop a continuous one-dimensional, general equilibrium spatial model consisting of an agricultural, manufacturing and vertically linked differentiated producer services sectors and we will demonstrate that manufacturing and producer service firms agglomerate if producer service output transportation costs are too high. On the other hand, given a small population size, only producer service firms agglomerate if producer service output transport costs are relatively lower. If the cost of transporting the agricultural good is very high, an agglomeration will not be developed. Subsequently, we introduce economies of scope in manufacturing sector through the presence of a sharable fixed input in order to discuss tradeoffs between concentration of production, to take advantage of scale economies, and dispersion of production, to take advantage of differing productivities across locations. We show that, given imperfect competition across differentiated goods, multiplant operations exist if scope economies are present and if input cost ratios across locations are neither too low or too high. Finally, we develop a simulation model to measure the investment diversion effect of tariff changes. It is analytically derived that, given imperfect competition market structure, profitability of manufacturing at each location reflects labor cost advantage, access to output markets and inputs producers, as well as intensity of competition, then an location index of profitability was constructed reflecting these elements. This measurement is adopted to a multinomial logit-type model and applied to the case of Japanese electronics direct investment changes resulting from the North American Free Trade Agreement. Our calculations show that Asian countries will receive slightly less investment from Japan as a result of NAFTA.