The indeterminacy of equilibrium city formation under monopolistic competition and increasing returns

We study the indeterminacy of equilibrium in the Fujita-Krugman (1995) model of city formation under monopolistic competition and increasing returns. Both the number and the locations of cities are endogenously determined. Assuming smooth transportation costs, we examine equilibria in city-economies where a …nite number of cities form endogenously. For any positive integer K, the set of equilibria with K distinct cities has a smooth manifold of dimension The authors thank an anonymous referee, Alex Anas, Glen Ellison, Masahisa Fujita, Jang-Ting Guo, John Nachbar, Esteban Rossi-Hansberg, Norman Scho…eld, Jacques-François Thisse, and the participants at the North American Meetings of the Regional Science Association International 2001 in Charleston, the 2003 North American Winter Meeting of the Econometric Society in Washington, D.C., the 13th European Workshop on General Equilibrium Theory in Venice, and a seminar at the University of Kansas for comments, but retain responsibility for any errors.