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Clustering or Co-Agglomeration? A Love-for-Variety Approach

We develop a simple partial-equilibrium model of endogenous city structure formation. No production externalities are at work, the only two forces shaping the spatial configurations of the city being love for variety (on the consumer side) and seeking for a better access to the market (on the firm side). We show that, unlike in existing models of a similar nature, our model generates clustering rather than co-agglomeration. Namely, if there are few firms relative to the urban population size, then firms tend to cluster at the city center, while consumers choose to reside on the outskirts. Otherwise, the opposite holds. Although a continuum of equilibrium city structures may emerge, we show that all spatial equilibria are segregated. In addition, the market outcome features spatial price dispersion, even though our framework does not involve imperfect information and search costs on the consumer side.