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WhyDoFirmsCluster?
Whydofirmslocateclosetooneanother?Localizationeconomies:firmsinanindustryclusterUrbanizationeconomies:firmsindifferentindustriesclusterFirmsclustertoShareintermediateinputsSharealaborpoolGetbettermatchesofworkersandlabortasksShareknowledge3-2
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ClusteringtoShareIntermediateInputsAnExample:DressmakersproducehighfashiondressesRapidchangesinfashionandoutput:FirmsaresmallnimbleScaleeconomiesinbuttonslargerelativetodemandofsingledressmakerFacetimerequiretodesignandfabricatebuttonstofitdressesDressmakersshareabutton-maker,andclustertofacilitatefacetime3-6
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AnotherExample:High-TechnologyFirmsRapidlychangingproductsnecessitatesintermediateinputsElectroniccomponentsTestingfacilitiesFirmsshareintermediateinputsupplierstoexploitscaleeconomiesFacetimeindesignandfabricationrequiresproximityandcluster3-8
Self-ReinforcingEffectsofClusteringTheTradeoffsBenefit:LocalizationeconomiesreducecostofintermediateinputCost:CompetitionforworkersincreaseslaborcostStartingwithisolatedfirms,willaclusterform?Howmanyfirmswilljointhecluster?3-9
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ClusteringtoShareaLaborPoolVaryingdemandforeachfirm:SoftwareTVprogramsFixedindustry-widedemand:zero-sumchangesindemandacrossfirmsExample:successofonefirm’sGISsoftwareatexpenseofothersLocationalequilibrium:Wageincluster=expectedwageinisolatedsite=$103-11
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ComputingProfitsLaborDemand:marginalbenefit=revenuecontribution=MRPProfitfromanindividualworker=MRP-wageProfitfromworkforce:TrianglebetweendemandcurveandwagelinePanelA:Expectedprofitforisolatedfirm=$48PanelB:Expectedprofitforisolatedfirm=(1/2)?($147+$3)=$753-14
MovetoClusterIncreasesExpectedProfitHighdemand(goodnews):moreprofitinclusterbecauseoflowerwageandmoreworkersLowdemand(badnews):lessprofitinc
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