Market potential and distance decay : growth and decline of sectors across locations in urban regions

This paper introduces a model which identifies the economic activity of each local economy (location) and observes the time distance between each pair of locations as well as the average time distance between sub locations in each local economy. The study focuses on five categories of firms: knowledge-intensive and ordinary business services, knowledge-intensive and ordinary manufacturing, and household services. We model how these categories increase and decrease their employment in each location in response to the location's market potential. We also show how the location pattern depends on each locations market potential. In this endeavor we distinguish between demand and supply potential. In the econometric analysis the market potential of each location is determined endogenously, and this also makes it possible to determine the geographic extension of urban regions. This exercise also includes an endogenous determination of sector-specific distance-decay parameters. The model succeeds in depicting the gradual increase of service activities in certain locations and manufacturing activities in others.