Agglomeration in a Core-Periphery Model with Vertically and Horizontally Integrated Firms

This paper analyses the effect of allowing for a more general production structure in the core-periphery (CP) modeI. Two special cases of fully horizontally and fully vertically integrated fmns are treated. The case of horizontally integrated finns is a counter-example to the strong agglomeration effects found in the CP model. A symmetric equilibrium will always be stable, and, hence, agglomeration is prevented. The introduction of vertically integrated finns that can separate the location of headquarter activities from the location of production, has two effects. First, they tend to break the symmetry of the original CP model, and, in this sense, they lead to more agglomeration. Second, they tend to decrease the parameter space in which full agglomeration occurs. In this sense they lead to less agglomeration.