Equilibrium Locations of Vertically Linked Industries.

There are two imperfectly competitive industries, upstream and downstream, and two locations. Where do the industries locate? Production occurs in both locations when transport costs are high (industry must be close to consumers) or low (factor prices determine location). Imperfect competition and transport costs create forward and backward linkages between upstream and downstream industries, and at intermediate transport costs these linkages determine location. There are multiple equilibria, some with agglomeration in a single location. Reducing transport costs from high to intermediate causes agglomeration and divergence of economic structure and income; further reductions may undermine the agglomeration, bringing convergence. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.