Locational disadvantage of the hub

We show how spatial evolution is different between the two representative models of economic geography: [Krugman 99:483–499, 1991] and [Ottaviano et al. 43:409–436, 2002]. We analyze the impacts of falling transport costs on the spatial distribution of economic activities and welfare for a network economy consisting of three regions located on a line. It is normally considered that a hub city, i.e., a central region, always has locational advantage and manufacturing workers gain from trade. This is true in the former model, but not in the latter when markets are opened up to trade. This is because the price competition is so keen in the central region that the manufacturing sector moves to the peripheral regions, which aggravates the social welfare. We then show that when goods are close substitutes and share of manufacturing is of an intermediate level, the manufacturing activities completely disappear from the central region leading to a full agglomeration in one peripheral region.

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