Economies of Agglomeration - Core-periphery Model

Core-periphery Model

Whilst localization and urbanization economies as well as their sources are crucial to sustaining agglomeration economies and cities, it is important to understand the long-term result of the function of agglomeration economies which relates to the core-periphery model. The core-periphery model basically features an amount of economic activity in one main area surrounded by a remote area of less dense activity. The concentration of this economic activity in one area (usually a city center) allows for the growth and expansion of activity into other and surrounding areas because of the cost-minimizing location decisions of firms within these agglomeration economies sustaining high productivity and advantages which therefore allow them to grow outside of the city (core) and into the periphery. A small decrease in the fixed cost of production can increase the range of locations for further establishment of firms leading to loss of concentration in the city and possibly the development of a new city outside the original city where agglomeration and increasing returns to scale existed.

In a nutshell, if localization economies were the main factor contributing to why cities exist with the exclusion of urbanization economies, then it would make sense for each firm in the same industry to form their own city. However, in a more realistic sense cities are more complex than that; which is the reason for the combination of localization and urbanization economies to form large cities.