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Abstract

Although transport costs are a key-ingredient of New Economic Geography, the transport sector is usually abstracted away from the analysis. Put differently, freight rates are taken as parametric and are not set by the market. This paper studies the relationships between transport costs, industry location, and welfare when freight rates are set by profit-maximizing carriers. We show that the demand for transport services becomes less elastic as the degree of spatial agglomeration rises, which increases carriers' market power and allows them to charge higher markups. Once it is recognized that firms and consumers are free to relocate in response to changes in transport costs, an increasing number of carriers, falling fixed or marginal costs in transportation, or both, trigger a gradual agglomeration of industry. In the long run, this leads to consumer welfare losses (and to aggregate welfare losses under free entry), with more inequality across agents living in different regions.

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File URL: http://www.sciencedirect.com/science/article/B6WMG-4V17CJV-1/2/d84d2594d072280bf5f39070d7e843bc
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 65 (2009)
Issue (Month): 2 (March)
Pages: 195-208

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Handle: RePEc:eee:juecon:v:65:y:2009:i:2:p:195-208

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Web page: http://www.elsevier.com/locate/inca/622905

Related research

Keywords: Transport sector New economic geography Imperfect competition Trade;

References

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Cited by:

1. Demirel, Erhan & Ommeren, Jos van & Rietveld, Piet, 2010. "A matching model for the backhaul problem," Transportation Research Part B: Methodological, Elsevier, vol. 44(4), pages 549-561, May.
   
   • Erhan Demirel & Jos van Ommeren & Piet Rietveld, 2007. "A Matching Model for the Backhaul Problem," Tinbergen Institute Discussion Papers 07-083/3, Tinbergen Institute, revised 19 Dec 2007.
2. Zeng, Dao-Zhi & Zhao, Laixun, 2010. "Globalization, interregional and international inequalities," Journal of Urban Economics, Elsevier, vol. 67(3), pages 352-361, May.
   
   • Dao-Zhi Zeng & Laixun Zhao, 2007. "Globalization, Interregional and International Inequalities," Discussion Paper Series 209, Research Institute for Economics & Business Administration, Kobe University.
3. Xu, Hangtian & Nakajima, Kentaro, 2013. "Highways and Development in the Peripheral Regions of China," PRIMCED Discussion Paper Series 33, Institute of Economic Research, Hitotsubashi University.

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