Endogenous Structure of Polycentric Urban Area I: Isolated City

The purpose of this paper is to investigate how the interplay between production, commuting and commuting and costs shapes the economy at intra-urban level. Specifically, we study how economic integration affects the internal stricture of cities and how decentralizing of production and consumption of goods in secondary employment centers allows firms located in a large city to maintain their performance. The main distinctive feature of the model is two-dimensional city structure with variable number of secondary business districts. Several new results in urban economics are established, which all agree with empirical evidence and some of them cannot be obtained in framework of the linear city model.