An economic theory of regional clusters

This paper investigates the impact of localization economies on firms' loca tions. It is known that such external effects lead to substantial cost redu ctions when firms are located together. However, when they are agglomerated , firms also face the prospects of tough price competition whose intensity can be related through product differentiation In addition, their access to isolated markets varies with the level of transport costs. As a result, th en is a trade-off whose solution depends on the structural parameter; of th e economy. The market and optimal solutions are compared for the case of sm all and large groups of firms, (C) 2000 Academic Press.