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Industry location and welfare when transport costs are endogenous

Kristian Behrens (), Carl Gaigne and Jacques Thisse ()

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Abstract: Although transport costs are a key-ingredient of New Economic Geography, the transport sector is usually abstracted away from the analysis. Put differently, freight rates are taken as parametric and are not set by the market. This paper studies the relationships between transport costs, industry location, and welfare when freight rates are set by profit-maximizing carriers. We show that the demand for transport services becomes less elastic as the degree of spatial agglomeration rises, which increases carriers' market power and allows them to charge higher markups. Once it is recognized that firms and consumers are free to relocate in response to changes in transport costs, an increasing number of carriers, falling fixed or marginal costs in transportation, or both, trigger a gradual agglomeration of industry. In the long run, this leads to consumer welfare losses (and to aggregate welfare losses under free entry), with more inequality across agents living in different regions.

Keywords: transport sector; new economic geography; imperfect competition; trade (search for similar items in EconPapers)
Date: 2012
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01208822
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Published in Recent developments in the economics of transport, 1, Edward Elgar Publishing, 1284 p., 2012, The International Library of Critical Writings in Economics series, 978 1 78100 649 8

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Journal Article: Industry location and welfare when transport costs are endogenous (2009) Downloads
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