Intermediate goods and the spatial structure of an economy

Abstract We develop a monopolistic competition model of spatial economy in which manufacturing requires a large variety of intermediate goods. The economy yields two types of monocentric configurations: an integrated city equilibrium ( I-specialized city equilibrium ) when transaction costs of intermediate goods are high (low). In the former, both manufacturing and intermediate sectors agglomerate in a single city. In the latter, the city is specialized in the provision of intermediate goods. When the economy is in an integrated city equilibrium, it is in a primacy trap such that population growth alone never leads to the formation of new cities.