Two Contrasting Transportation Costs: Complementary and Substitute Perspectives

Two contrasting attributes of transportation costs are introduced in this analysis. These are categorized as internal and external to the firm or the industry. It is shown that the trade-off interaction between agglomeration economies and transportation costs in established location theory solely refers to the external nature of transportation costs to the firm. This paper reveals that there is another type of transportation costs which is internal to the firm and plays an important role in the structure of the production linkages within the industry. An alternative model is demonstrated to clarify the roles of these two types of transportation costs as substitute and complementary effects to agglomeration economies.