DP3362 Agglomeration and Market Interaction
The most salient feature of the spatial economy is the presence of a large variety of economic agglomerations. Our purpose is to review some of the main explanations for this universal phenomenon, as they are proposed in urban economics and modern economic geography. We first show why the competitive framework can hardly be the foundation for the economics of agglomeration. We then briefly review the alternative modelling strategies. In the hope of making our Paper accessible to a broad audience, we present in detail the two (specific) models that have been used so far to study the spatial distribution of economic activities. Several extensions of these models are discussed in the subsequent section. We conclude with some suggestions for further research and policy implications.