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Firms Location under Demand Heterogeneity

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  • Pierre M. Picard

    (CREA, University of Luxembourg (Luxembourg), and CORE, Université catholique de Louvain (Belgium).)

  • Toshihiro Okubo

    (RIEB, Kobe University)

Abstract

In this paper we build an economic geography model where firms sell product varieties with heterogenous demands. We show that firms selling the products with higher demands select to set up their plants in larger countries. Larger countries do not only get better access to more varieties but also to the most demanded and valuable ones. The impact of such a spatial selection on firms' location choice depends on the skewness of the distribution of demand intensity across varieties. In a model where only capital moves across regions, demand heterogeneity generally diminishes the amount of capital invested in the larger country. In a model where the work force moves across regions, demand heterogeneity is shown to eliminate dramatic changes in the location patterns and to result in the asymmetric dispersion of workers, rather their symmetric dispersion or complete agglomeration in a specific region.

Suggested Citation

  • Pierre M. Picard & Toshihiro Okubo, 2011. "Firms Location under Demand Heterogeneity," DEM Discussion Paper Series 11-07, Department of Economics at the University of Luxembourg.
  • Handle: RePEc:luc:wpaper:11-07
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    Cited by:

    1. Rikard Forslid & Toshihiro Okubo, 2015. "Which Firms Are Left In The Periphery? Spatial Sorting Of Heterogeneous Firms With Scale Economies In Transportation," Journal of Regional Science, Wiley Blackwell, vol. 55(1), pages 51-65, January.
    2. Toshihiro Okubo & Pierre M. Picard & Jacques-François Thisse, 2014. "On The Impact Of Competition On Trade And Firm Location," Journal of Regional Science, Wiley Blackwell, vol. 54(5), pages 731-754, November.
    3. Picard, P.M., 2015. "Trade, economic geography and the choice of product quality," Regional Science and Urban Economics, Elsevier, vol. 54(C), pages 18-27.
    4. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    5. Ottaviano, Gianmarco I.P., 2012. "Agglomeration, trade and selection," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 987-997.
    6. repec:esx:essedp:729 is not listed on IDEAS
    7. P. M. Picard & A. Tampieri, 2021. "Vertical differentiation and trade among symmetric countries," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1319-1355, June.
    8. Breinlich, Holger & Ottaviano, Gianmarco I.P. & Temple, Jonathan R.W., 2014. "Regional Growth and Regional Decline," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 4, pages 683-779, Elsevier.
    9. Sergey Kichko & Pierre M. Picard, 2018. "Heterogeneity in Conformism, Firm Selection, and Home Bias," HSE Working papers WP BRP 187/EC/2018, National Research University Higher School of Economics.
    10. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    11. Wei, Zelong & Song, Xi & Wang, Donghan, 2017. "Manufacturing flexibility, business model design, and firm performance," International Journal of Production Economics, Elsevier, vol. 193(C), pages 87-97.
    12. Dalvai, Wilfried, 2016. "Agglomeration and the product mix," Thuenen-Series of Applied Economic Theory 145, University of Rostock, Institute of Economics.

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    More about this item

    Keywords

    heterogeneous taste and quality; spatial selection; economic geography; agglomeration; home market effect;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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