Spillover effects and the evolution of firm clusters

In this paper we consider the impact of spillovers occurring within each of two groups of firms on the long run agglomeration patterns in a market. In each period every single firm can either produce for this market or choose some outside option (e.g. a risky asset). Firms switch between the two options based on information about the relative profitability of the market and the outside option. In the market, due to spillovers, the production costs are influenced by the number of firms from the same population which are in the market. The resulting model describes the evolution of the size of the two firm clusters and their market shares over time. We provide a global analysis of the existence and basins of attraction of equilibria to address the question what impact different constellations of spillover effects have on the growth of dominant respectively incoming clusters. We demonstrate that the basins of attraction of coexisting long run equilibria do not depend continuously on the size of the spillover effects. Furthermore, an increase in the initial cluster size is not necessarily beneficial if the switching behavior of firms is fast. (C) 2003 Elsevier Science B.V. All rights reserved.