Spatial effects of transport infrastructure: The role of market structure

Theoretical reasoning shows that spatial effects of transport cost reductions may crucially depend on market structures in the tradables sector (degree of market power, strength of economies of scale, free or no free entry). The aim of this paper is to compare empirically the effects of transport cost reductions due to infrastructure investments, emerging under different market structures. To this end, a computable spatial general equilibrium model with costly interregional trade is presented, which is calibrated for a large number of regions covering Europe. Applying this model, transport cost reductions are simulated under two different assumptions with regard to the market structure prevailing in the tradables sector: (1) perfect competition with constant returns to scale, and (2) monopolistic competition with increasing returns and free entry. Results are compared in terms of money-metric measures of regional welfare changes.