Information technology, market congestion, and economic geography

Abstract

AbstractI investigate the impact of economic integration, in terms of trade costs and information technology, on the interregional location patterns of retail firms by introducing three features into a new economic geography model: individuals consume only a restricted number of varieties; firms compete for customer acquisition; and the advancement of information technology enables consumers to easily perceive and buy products sold by firms in distant regions. I consider two possibilities regarding competition for attention: relative competition, in which a firm can attract more consumers by advertising more than the average level, and absolute competition, in which each firm competes with another to enhance the share of its advertisement in the market. I show that consumption variety is richer in the agglomerated region, but spatial consumption inequality shrinks as information technology develops. A reduction in trade costs may cause the redispersion of economic activities under sufficiently low trade costs only in the case of absolute competition. This is more likely when competition for attention is fierce and information technology is not fully developed. The results not only support the complementarity between information technology and cities but also provide a new insight that competition among firms is an important factor governing the impact of information technology on economic geography.