We investigate the role of competitive transport markets in shaping the location of economic activity and the pattern of trade. In our model, carriers supply transport services for shipping manufactured goods, and freight rates are set to clear transport markets. Each carrier must commit to the maximum capacity for a round-trip and thus faces a logistics problem as there are opportunity costs of returning empty. These costs increase the freight rates charged to firms located in regions that are net exporters of manufactured goods. Since demand for transport services depends on the spatial distribution of economic activity, the concentration of production in one region raises freight rates to serve foreign markets from there, thus working against specialization and the agglomeration of firms. Consequently, a more even spatial distribution of firms and production prevails at equilibrium when freight rates are endogenously determined than when they are assumed to be exogenous as in the literature.
The aim of this paper is to study the spatial selection of …rms once it is recognized that heterogeneous …rms typically choose di¤erent locations in respond to market integration of regions having di¤erent sizes. Speci…cally, we show that decreasing trade costs leads to the gradual agglomeration of e¢ cient …rms in the large region because these …rms are able to survive in a more competitive environment. In contrast, high-cost …rms seek protection against competition from the e¢ cient …rms by establishing themselves in the small region. However, when the spatial separation of markets ceases to be a su¢ cient protection against competition from the low-cost …rms, high-cost …rms also choose to set up in the larger market where they have access to a bigger pool of consumers. This leads to the following prediction: the relationship between economic integration and interregional productivity di¤erences …rst increases and then decreases with market integration.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.