Market size and urban hierarchy

We investigate the importance of market size as a determinant for industrial location patterns. In order to focus on a broad range of sectors,including the service industries, both traded and non-traded goods are taken into consideration. In our model, traded goods industries always exhibit a "home market effect" (HME), whereas the existence of such an effect for non-traded goods and services crucially hinges on the degree of product differentiation. High degrees of product differentiation generally support a HME, whereas a reverse HME may arise when products are sufficiently close substitutes. Our results point to the existence of some market size dependent "industrial urban" hierarchy: highly differentiated non-traded services are more sensitive to market size than manufacturingactivities and traded services, which in turn are more sensitive to market size than closely substitutable non-traded services.