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Industry location and welfare when transport costs are endogenous

Author

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  • Kristian Behrens

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

  • Carl Gaigné

    (SMART-LERECO - Structures et Marché Agricoles, Ressources et Territoires - INRA - Institut National de la Recherche Agronomique - AGROCAMPUS OUEST)

  • Jacques-François Thisse

    (CORE, Centre For Operation Research And Econometrics - UCL - Université Catholique de Louvain = Catholic University of Louvain, Centre for Economic Policy Research, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

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.

Suggested Citation

  • Kristian Behrens & Carl Gaigné & Jacques-François Thisse, 2012. "Industry location and welfare when transport costs are endogenous," PSE-Ecole d'économie de Paris (Postprint) hal-01208822, HAL.
    • Handle: RePEc:hal:pseptp:hal-01208822
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