LOCATION CHOICES UNDER AGGLOMERATION EXTERNALITIES AND STRATEGIC INTERACTION

Fredrick Flyer, J. Myles Shaver

Research output: Chapter in Book/Report/Conference proceedingChapter

19 Scopus citations

Abstract

The influence of agglomeration externalities on a firm's profits depends on the efficiency benefits it derives from collocating and on the contributions it makes to its competitors production processes. We examine the economics of firm location choice with a duopoly model that allows for asymmetric contributions by firms to production externalities. In the model, the magnitude of a firm's contributions to industry agglomeration externalities is determined by its R&D levels and by how closely it locates to the other firm. Through numerical simulations, the effects of firm heterogeneity on industry geographical organization are evaluated. Specifically, the relationships between industry agglomeration strength, R&D investment, location choice timing and Nash equilibria industry structures are explored. The findings from this exercise indicate that geographic collocation tends to occur in industries with symmetry in firm R&D spending and where high R&D firms are the initial entrants. Moreover, we find that under some industry conditions, strengthened agglomeration economies encourage firms to locate more distant from each other rather than collocate. Finally, our simulations also show that firms' profits tend to increase yet total welfare decreases as agglomeration economies strengthen.

Original languageEnglish (US)
Title of host publicationGeography and Strategy
Pages193-213
Number of pages21
DOIs
StatePublished - Dec 1 2003
Externally publishedYes

Publication series

NameAdvances in Strategic Management
Volume20
ISSN (Print)0742-3322

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