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Industry location and welfare when transport costs are endogenous

Listed author(s):
  • Kristian Behrens

    (CORE, Centre For Operation Research And Econometrics - UCL - Université Catholique de Louvain, UQAM - Université du Québec à Montréal , Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE) - HEC Montréal - HEC Montréal)

  • Carl Gaigné

    ()

    (UMR 1302 Structures et Marchés Agricoles, Ressources et Territoires - INRA - Institut National de la Recherche Agronomique - AGROCAMPUS OUEST - SMART - Structures et Marchés Agricoles, Ressources et Territoires)

  • Jacques-François Thisse

    (CORE, Centre For Operation Research And Econometrics - UCL - Université Catholique de Louvain, Centre for Economic Policy Research, PSE - Paris School of Economics)

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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Paper provided by HAL in its series Post-Print with number hal-01208822.

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Date of creation: 2012
Publication status: Published in Recent developments in the economics of transport, 1, Edward Elgar Publishing, 1284 p., 2012, The International Library of Critical Writings in Economics series, 978 1 78100 649 8
Handle: RePEc:hal:journl:hal-01208822
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01208822
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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