Regional Inequality and Product Variety
CORE Discussion Paper No. 2005/9
15 Pages Posted: 26 Feb 2006
Date Written: January 23, 2005
We investigate how differences in set-up costs of various types affect the trade-off between global efficiency and spatial equity and show that the standard assumption of symmetry in fixed costs masks the existence of an interesting effect: the range of available varieties varies depends on the spatial distribution of firms. In such a setting, even when the market outcome leads to excessive agglomeration under symmetric fixed costs, a planner opts for asymmetric fixed costs and more agglomeration. The reason is that the losses induced by more agglomeration are offset by the gains due to additional product variety.
Keywords: fixed costs, set-up costs, market size, international trade, home market effect
JEL Classification: F12, F15, R12, R38
Suggested Citation: Suggested Citation