Location Patterns Dominated by Cohesion Chapter 5

Introduction Certain activities are obviously clustered geographically –Example of movies and theater, wine production…etc are examples of concentration due to complementarities. Concentration is also possible for competing firms. –Competing chain stores are nearby each other. –Retailers of specialized products (car dealers)

External Economies Agglomerative forces arise because of the nature of the activity –Purchasing a commodity doesn't require inspection while buying cars does. –Variety of output attracts demand to the location (example of shopping malls) External economy of agglomeration of an activity—"external" to the individual unit involved because the advantages depend on how many other units of its type are joining it to make a cluster that attracts demand to the location

External Economies: Characteristics of the Production Process One of the sources of external economies of concentration is demand attraction Others involve cost and supply considerations that affect similar industries Each firm has fixed costs and thus face portions of declining average costs for each activity Specialization allows each activity (eg. the button and coat manufacturers) to produce higher quantities of a specialized product for the same level of input use

Shifts in Cost Schedules If each member of the cluster specializes and operates at lower average costs other firms in the cluster may be able to buy inputs cheaper Other sources of economies of agglomeration include: –the ability of group members to maintain smaller inventories – increases in labor productivity resulting from specialization in the work place, –increased efficiency in management and organization. These result in a downward shift in the cost function

Shifting Average Costs

Firm Characteristics So we would expect firms that find “external economies” to be mostly single plant firms. Since external economies are related to scale of production there is no reason to have multi-plant firms

Economies of Size Associated with the size of the production unit –Firms have fixed costs, and they are constrained by managerial complexity of capital (increasing marginal costs). Associated with size of firm –Each location is constrained by the size of the market area but it is efficient for large firms to operate multiple locations (food retailers) Associated with the size of the cluster –Demand attraction –Advantages created by specialized inputs and labor, lower inventories, technology/knowledge spillovers

Lichtenberg’s Study of "External-Economy Industries Robert M. Lichtenberg measured the geographic concentration of several industries in NYC. –Compared the region’s share of national employment in each industry to the region’s share of total national employment Prevalence of single-unit firms Small size of plant, high labor intensity (as suggested by small energy use per worker), Small inventories implying fast turnover. Transport sensitive plants have larger plants in NYC relative to elsewhere Firms more likely to face agglomeration economies have smaller plants in NYC relative to the rest of the nation

Single plant firms likely to find external economies

Urbanization Economies So far we considered advantages of firms locating in a cluster of closely related industries The benefits to any individual cluster of activity may depend on the size and type of the urban area that they are located –Richard Florida’s work shows development in cities to be highly correlated with entertainment value. –These advantages are external to the location unit or even cluster but internal to the metro area

Measuring Urbanization Economies

Empirical Findings David Segal obtained estimates of aggregate production functions along with their implied labor demand A simplified version of the functional form he uses is given by –where Q is output, K is capital stock, and L is employment (quality adjusted) –Technical efficiency is characterized by the multiplicative constant AS c, where S is a dummy variable denoting size.

Findings Segal finds constant returns to scale in aggregate production (a + b =1), Estimates of c are of the order of.08 for cities with populations of 2 to 3 million. This translates to an 8 percent productivity gain (the shaded area in Figure 5-2) for metropolitan areas when this population threshold is reached.Figure 5-2