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17-05-2022 | Original Paper

Demand-pull versus cost-push: monocentric equilibrium in a spatial network

Author: Ahmed Saber Mahmud

Published in: The Annals of Regional Science | Issue 2/2022

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Abstract

The present model combines insights from two different approaches in the literature. The first one focuses on scale economies and aggregate demand externality. The second approach is without scale economies, and the focus is on the accessibility of markets where production is location-specific. We assume the existence of multiple regions connected by a pre-existing network. In our framework, the manufacturing sector is mobile, and production can occur under both scale economies and without. On the other hand, agriculture is location-specific, and each area produces a particular variety. Only manufacturing goods incur transportation costs in our first model (demand-pool). We illustrate that agglomeration can only proceed in the presence of scale economies. Scale economies require a large pool of workers; there is greater demand in the metropolitan area. Since there is no cost of trading within the metro area, higher demand leads to agglomeration. When aggregate demand externality is a factor, geographical and history become pertinent in selecting an urban manufacturing center. In the second model (cost-push), the transportation cost for agriculture is positive, while manufacturing goods can be transported without costs across regions. Hence, aggregate demand externality is no longer present. Since agriculture is heterogeneous and consumers prefer to consume all varieties, locating in regions with easier access to rural hinterlands is more profitable. Consequently, geographical factors alone determine the location choice.

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Appendix
Available only for authorised users
Footnotes
1
Under a CRS technology, the doubling of inputs leads to doubling of production.
 
2
Numeraire is the benchmark price that is held constant in the model and other prices are determined in relative to it.
 
3
Under an IRS technology, the doubling of inputs lead to more than doubling of production.
 
4
In this model, we do not have congestion costs. Therefore, goods are transported via the minimum geodesic distance only.
 
5
We choose different transportation cost functions for manufacturing and agriculture for analytical convenience. The paper's basic conclusion that the industrial location is remaining indeterminate in the first model in contrast to the second one will remain valid regardless of the specification.
 
6
The firms assume the prices to remain constant when relocation takes place.
 
7
Anas (1988) and Anas and Kim (1996) analyze where congestion costs lead to the emergence of multiple urban areas.
 
8
A full-fledged analysis on intersectoral linkages requires a separate paper altogether. Hence, we only provide a brief example by modifying the current setup.
 
9
“London was the largest. Its population is estimated to have increased from 575,000 to 2.3 million between 1700 and 1851. The rate of increase was much larger in Manchester and Liverpool. Both had no more than 2500 inhabitants in 1700, but by 1851 they had more than 300,000 inhabitants” (Alvarez-Palau et al. 2020).
 
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Metadata
Title
Demand-pull versus cost-push: monocentric equilibrium in a spatial network
Author
Ahmed Saber Mahmud
Publication date
17-05-2022
Publisher
Springer Berlin Heidelberg
Published in
The Annals of Regional Science / Issue 2/2022
Print ISSN: 0570-1864
Electronic ISSN: 1432-0592
DOI
https://doi.org/10.1007/s00168-022-01143-9