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Industry location and welfare when transport costs are endogenous

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Author Info

  • Kristian Behrens

    (Université du Québec
    CIRPEE;Centre interuniversitaire sur le risque, les politiques économiques et l'emploi, Université Laval
    CORE;Center for Operations Research and Econometrics, Université Catholique de Louvain)

  • Carl Gaigné

    ()
    (Structures et Marchés Agricoles, Ressources et Territoires, INRA)

  • Jacques-François Thisse

    (CORE;Center for Operations Research and Econometrics, Université Catholique de Louvain
    Ecole d'Economie de Paris
    Centre for Economic Policy Research)

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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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    Bibliographic Info

    Paper provided by Institut National de la Recherche Agronomique, France in its series Working Papers with number 32349.

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    Length: 195-208
    Date of creation: 2009
    Date of revision:
    Publication status: Published in Journal of Urban Economics
    Handle: RePEc:inr:wpaper:32349

    Note: Jel Classification: F12, F16, R12, R48
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    Related research

    Keywords: TRANSPORT SECTOR; NEW ECONOMIC GEOGRAPHY; IMPERFECT COMPETITION; TRADE;

    References

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