The role of market power in the spatial location of industry

This research investigates whether market structure conditions under which firms operate have an impact on their location decisions. In particular, this paper explores the location decisions of firms which are Cournot competitors when agglomeration economies, cost-reducing benefits that come about due to collocation with other firms, occur. This analysis is unique in that location decisions in the presence of agglomeration economies are traditionally explored in the context of nonstrategic firms. In this paper, firms are allowed to strategically react to rivals in both output and location decisions. This allows for a more rich investigation of location decisions and agglomeration's impacts. The research method employed includes a theoretical model that generates a series of testable hypothesis about two general firm and location setups. In one, two firms decide their optimal Nash location amongst two locations. In the other, three firms decide their location amongst three locations. Decisions are made first under the assumption that firms are symmetric, or have identical sized demands, and then under the assumption of asymmetric firms. This theoretical model predicts that under certain circumstances, agglomeration will be a Nash equilibrium location pattern. In particular, symmetric firms will find agglomeration beneficial when the competitive effects of collocation on their price is outweighed by agglomeration economies. When firms are asymmetric, dominant firms have a very large incentive to agglomerate, while fringe firms do not. The hypotheses generated in the theoretical model are tested using data on spatial concentration and market power in eighteen 4-digit SIC industries. Spearman rank correlation measurements are found between the Herfindahl-Hirschman Index (HHI) and a Spatial Concentration Index (SCI) of these industries. The empirical model suggests that there is a strong correlation between firms' of market power and their propensity to agglomerate. Specifically, high HHI industries also tend to be highly concentrated. This supports the predictions regarding asymmetric firms produced in the theoretical model and supports the conjecture that market structure and strategic interaction among firms will impact agglomeration decisions.