Chapter
3: Big and Small Cities
One of the purpose of this chapter is to provide
some insight into why cities vary in size and scope, addressing the question
Why aren’t all cities the same size?
LOCALIZATION
ECONOMIES AND INDUSTRY CLUSTER
The clusteering is
puzzling because dispersing into separate territories would reduce competition
for worker and perhaps brings firms closer to their dispersed costumers. There
are some subtle benefits from clustering: sharing the suppliers of intermediate
inputs, sharing a pool of labor, and sharing information. The label these
external economies is “localization economies” indicating that the cost savings
occur only for local firms
Sharing
Input Supplier
Some industry clusters
occur because firms in a particular industry buy an intermediate input from the
same supplier. Firms will cluster around a common input supplier if two
condition are satisfied:
1.
The input demand of an individual firms
is not large enough to exploit the scale economies in the production of the
intermediate input.
2.
Tansportation cost are relatively high.
Similiarly, if the intermediate input is bulky, fragile, or must be delivered
quickly, proximity is important.
There is evidence of
clustering based on input sharing. If a firm face uncertain and rapidly chaning demand for its
product, it will be small and agile, and will have an incentive to share input
supplier.
Sharing
a Labor pool: varying Demand for Labor
A firm faces two sorts
of questions about its future labor demand:
1.
How many workers will we hire?
2.
What sort of labor skill will we need in
our workers?
If a firm is uncertain
about the quantity of workers it will hire or the skills of its workforce, it
will have an incentive to cluster around other firms and draw from a common
labor pool. Eventually, the workers in the unsuccessful firms will move to the
succcessful one. Worker also can easily switch to a different firm in the city
Benefits
and Costs of Labor pooling
Consider a software
firm that has two equally likely outcomes in a particular year: good times or
bad times. In good times the price of its product is high, so the firm has a
relatively high demand for labor. In bad times the price of its product is low,
so the firm has a relatively low demand for labor.
Consider the trade-offs
associated with moving the firm from the isolated site to the industry cluster
with the labor pool, the benefits of moving to the cluster is that during good
times, the firm would pay a lower wage and earn more profit.
Sharing
a Labor pool: Matching
Consider next issue of
uncertainty about what sort of job skills a firm will require. Although a firm
probably knows what sorts of labor skills it needs this year uncertainty about
the future demand for its product and future production technology causes
uncertainty about the firms future needs for labor skills. A large labor pool
near an industry cluster provides a wider variety of skills for firms to tap.
Sharing
information: knowledge spillovers
A city provides
opportunities for intyeractions among people with common interest and thus
promotes creative thought. There is evidence that knowledge spillovers
encourage industry clustering . knowledge spillovers increase number of new
plants births, with the largest effect on industries that employ college.
knowledge spillovers are strongest in industries with many small, competitive
firms.
URBANIZATION
ECONOMIES
Urbanization economies
differ from localization economies in two ways. First, urbanization economies
result from the scale of the entire urban economy. Second, urbanization
economies generate benefits from firms throught the city. They are similar to
localization economies in the sense that they arise for the same reasons
1.
Intermediate
inputs. Firms from different industries share the
suppliers of intermediate inputs, allowing the realization of scale economies
in the provision of business services.
2. Labor pooling. If fluctuations in the labor demands of
different industries are not correlated, workers in a declining industry can
easily switch to a growing industry
3. Sharing information.
The knowledge spillovers lead to innovation in product design and production
methods.
EVIDENCE
OF EXTERNAL ECONOMIES
In searching for
evidence of localization economies, researchers focus on the effects of
industry concentration on (1) worker productivity, (2) the number of new
production plants, (3) growth in industry employment.
Evidence
of Localization Economies
Localization economies
as the elasticity of output per worker with respect to industry output, defined
as percentage change in output per worker divided by the precentage change in
industry output. Agglomeration effects in the office sector are much more powerfull than those in
manufacturing. In addition, the agglomeration effects are largest in the area
of the city where the increase in office employment occurs. The benefits
associated with localization economies fall rapidly with distance.
The
Incubation Process
Localization and
urbanization economies are responsible for the incubation process. Product
cycle theory of industrial location: product are developed by small firms in
areas that allow sharing of inputs and knowledge spillover. When the product
becomes standardized, the firm can produce it on a larger scale in its own
production facilities.
DIFFERENCES
IN CITY SIZE
In this chapter, we’ve
seen why some types of firms cluster in cities
Localization
Economies
Industries vari in the
strength of their localization economies. Some industries experience subtantial
cost savings from input sharing, labor poolong and information spillovers,
while others experience relatively small cost savings. The stronger the
localization economies, the greater the incentive for firms to form an industry
cluster with large concentration of employment.
Urbanization
Economies
Consider next the role
of urbanization economies, the spillover benefits that result from the scale of
the entire metropolitan area not just a particular industry. Firms in an
industry subject to urbanization economies are attracted to large metropolitan
areas and this tend to make large cities larger.
The
Role of Consumer Goods
in fact, workers in a
city spend some of their income on consumer product provided within the city.
The jobs supported by local consumer spending is often labeled local
employment. Some product are available in all cities, large, medium, and small.
If product has large per capita demand relative to scale economies in
production, even a small city will generate enough demand to support a firm
producing the product.
AGGLOMERATION
ECONOMIES IN MARKETING: SHOPPING EXTERNALITIES
A shopping externalities
occurs if the sales of one store are affected by the location of other stores.
These shopping externalities cause firms selling related product to form retail
clusters. Some retail cluster cause the development of market cities. Other
clusters within large cities, generating downtown shopping areas, malls, and
shoping centers. There are two types of product that generate shopping
externalities: imperfect substitutes and complement.
Imperfect
Substitutes
Two goods are imperfect
substitutes if they are similar but not identical. For these goods, the
clustering of firm selling similar product decrease shopping cost and attracts
potential buyers. Some retailers cluster in the city center, while others
cluster in shopping centers and malls.
Complementary
Goods
Complementary goods are
often purchased on the same shopping trip. The shoe store will benefit from the
presence of the pants store because together they provide one stop shopping for
consumers. Because of the benefit of one stop shopping, firms selling
complementary goods cluster in shopping centers.
INNOVATIONS
IN TELECOMUNICATIONS AND THE FUTURE OF CITIES
An improvement in telecomunications has two effects
on the number of face to face contacts
·
In a given relationship, some face to
face encounters will be replaced by telecomunication: An investment banker
could e-mail a client instead of meeting her for a brief conversation; the
banker could fax a contract instead of delivering it by hand
·
Easier communication may increase the
number of relationships. An investment banker could consult with more people in
the process of evaluating the merits of particular project; the banker could
handle more projects.
Innovations in
telecommunication technology will not cause cities to didappear because some
activities require face time, so there will always be a need for cities and the
physical proximity they provide.
A shopping externality
occurs if the sales of a perticular store oncrease as other retailer move
closer to the store. These agglomerative economies in marketing cause the
clustering of retailers.
