Agglomeration economies, search costs and industrial location

by John McCall, Anthony H. Pascal

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Clustering lowers costs of doing business for certain firms in certain locations, but such direct cost reductions appear an unsatisfactory explanation for the amount of agglomeration actually observed. When a newly organized enterprise decides on its initial location it faces uncertainty. The location of its eventual suppliers, workers and customers can only be imperfectly perceived. Since it costs so much for a new firm to acquire information about its optimal location, its managers will naturally be drawn to sites where rival firms appear to thrive. Thus information is economized. Once in place the firm begins to accumulate information. If the chosen site is discovered to be disadvantageous the firm may relocate or establish branches in new locations. The cost of information and economizing of resources devoted to search is part of the interconnected process of clustering and decentralization among firms.

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