- New Horizons in Regional Science series
Edited by Charlie Karlsson, Börje Johansson and Roger R. Stough
Chapter 1: Regional Interaction and Economic Diversity: Exploring the Role of Geographically Overlapping Markets for a Municipality’s Diversity in Retail and Durables
1. Regional interaction and economic diversity: exploring the role of geographically overlapping markets for a municipality’s diversity in retail and durables Martin Andersson and Johan Klaesson INTRODUCTION 1.1 In regional and urban economics, there is a fundamental relationship between market size and diversity. For example, in models building upon Dixit and Stiglitz’s (1977) general equilibrium model of monopolistic competition (which in turn, draws upon Chamberlin, 1933), diversity in inputs generates increasing returns in the aggregate (see, for example, Fujita and Thisse, 2002). Due to increasing returns of diversity in intermediaries, firms located in a region with a diverse set of input suppliers will experience higher productivity. The analog reasoning can be applied to consumers: if the utility of consumers has increasing returns in diversity of goods and services, consumers ought to be attracted to locations that offer a large market, since such locations allow for a diversified supply of goods and services. In the presence of fixed costs in production, the extent of diversity depends on the size of the market. A large set of empirical studies supports the view that there are positive effects of diversity. In a survey on urban diversity and economic growth, for instance, Quigley (1998: 136) writes: no matter how [empirical] results are described, it remains clear that the increased size of cities and their diversity are strongly associated with increased output, productivity and growth. Large cities foster specialization in production and sustain a broader range of final products, increasing the returns of their firms...
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