EQUILIBRIUM LOCATIONS OF VERTICALLY LINKED INDUSTRIES

There are two imperfectly competitive industries, upstream and downstr eam, and two locations. Where do the industries locate? Production occ urs in both locations when transport costs are high (industry must be close to consumers) or low (factor prices determine location). Imperfe ct competition and transport costs create forward and backward linkage s between upstream and downstream industries, and at intermediate tran sport costs these linkages determine location. There are multiple equi libria, some with agglomeration in a single location. Reducing transpo rt costs from high to intermediate causes agglomeration and divergence of economic structure and income; further reductions may undermine th e agglomeration, bringing convergence.