policymakers demonstrate

Regional Disparities and Efficient Transport Policies 339
translated into large ex post advantages once firms operate under increasing
returns.
The HME explains why large markets attract firms. However, this effect does
not explain why some markets are bigger than others. The problem may be tackled
from two different perspectives. First, the two regions are supposed to be the
same size and the internal fabric of each region (e.g., the magnitude of agglomeration
economies) determines the circumstances in which a region accommodates
the larger number of firms. Second, workers are allowed to migrate from
one region to the other, thus leading to some regions being larger than others.
The former case – when the two regions are a priori identical – is studied
below, while the latter case is investigated in Section 8.3.3 because the mobility
of labour generates effects that differ from those observed under the mobility
of capital.
8.3.2 Agglomeration Economies and the Emergence of
Asymmetric Clusters
According to Porter (1998), the formation of industrial clusters depends on the
relative strength of three distinct forces: the size of intrasectoral agglomeration
economies, the intensity of competition, and the level of transport costs.
Despite the existence of a huge empirical – and inconclusive – literature devoted
to industrial clusters, how the three forces interact to shape the regional economy
has been neglected in NEG. This is probably because working with a
model that accounts for the main ingredients of urban economics and NEG
seems out of reach. Yet the formation of clusters can be studied by adopting a
‘reduced-form’ approach in which a firm’s marginal production cost in a region
decreases with the number of firms locating in the region. In doing this, one captures
the effect of agglomeration economies and can study how agglomeration
economies operating at the local level interact with the dispersion force generated
by market competition in the global economy through lower trade costs
(Belleflamme et al., 2000). In a spatial equilibrium, firms earn the same profits.
However, if firms observe that one region offers higher potential profits than
the other, they want to move to that region. In other words, the driving force
that sustains the relocation of firms is the profit differential between the North
and the South.
To show why and how a hierarchy of clusters emerges, we look at the interplay
among the above three forces as a symmetry-breaking device. Therefore,
we start with a perfectly symmetric set-up in which firms and consumers are
evenly dispersed between the North and the South. When trade costs start
decreasing, trade flows grow but, in the absence of agglomeration economies,
firms stay put because spatial separation relaxes competition between firms.
Things are very different when agglomeration economies are at work. In this