Models of agglomeration under demand uncertainty

Abstract

Agglomeration economies are defined as economies of scope which may result from the agglomeration of an urban area. Such economies are realized as a function of the concentration of individuals and industries in a geographic area and are external to those economic agents. The geographic area typically under consideration is the urban area. This dissertation formalizes a theory of agglomeration and derives some economies which may result from the agglomeration of an urban area. Beginning with the assumption of random market demand for a good and a perfectly competitive industry, the models of this thesis develop the fundamental tenets of agglomeration under demand uncertainty. The basic conditions under which economies resulting from the increased agglomeration of the urban area might be expected to exist are then derived. The models developed in this thesis are specifically designed to discuss the hypothesized agglomeration economy of reduced optimal firm inventories, as discussed in the Mills Proposition. The results derived yield evidence to support Mills' contention that reduced firm inventories are a potential economy resulting from the agglomeration of an urban area.