Product diversity, taste heterogeneity, and geographic distribution of economic activities: ?: market vs. non-market interactions

There are two independent strands of literature on the geographic distribution of economic activities. One is the new economic geography that emphasizes product diversity, and the other is probabilistic migration that stresses taste heterogeneity in residential location. This article incorporates these two characteristics into a single framework, and analyzes how they affect the number and stability of equilibrium geographic structures. It shows that the home market effect due to market-mediated product diversity creates an agglomeration force, whereas idiosyncratic taste differences due to non-market interactions serve as a probabilistic immobile factor and induce a dispersion force. The tension between these opposite forces, together with the decline in transportation costs, yields different patterns of agglomeration and the associated changes in interregional wage differentials.  2002 Elsevier Science (USA). All rights reserved. JEL classification: R12; R13; F12