The chief aim in this chapter is to establish a definitive list of the CP model’s key features and thus provide a benchmark for gauging the more analytically
amenable models that we will use for our policy analysis.
2.4.1 Related Literature
The seminal CP model is found in Krugman (1991a,b), although the version we work with here is from Chapters 4 and 5 of FKV. Useful surveys the theoretical work in the new economic geography literature can be found in Ottaviano and Puga (1998), Ottaviano (2000) and Neary (2001). The relationships between the CP model and the urban and regional literatures are discussed by Fujita and Thisse (1996), and in greater detail by Fujita and Thisse (2002). A critical assessment is provided by Martin (1999).
The first formal treatment of the dynamic aspects of the CP model appeared in the PhD thesis of Diego Puga that was eventually published as Puga (1999). Puga (1999) also introduces an additional dispersion force (diminishing returns in
agriculture) that implies that the symmetric outcome is stable for both very high and very low degrees of openness. Helpman (1997) shows that the presence of non-tradable goods can change the relation between trade freeness and agglomeration. In his setting agglomeration takes place for high rather than low trade costs. We discuss this result in the linear version of the CP model presented in chapter 5.
Additionally, a number of extensions and technical analyses of the CP model have appeared after FKV was published. Robert-Nicoud (2002) provides the first analytic proof of the CP model’s main features, namely that the break point comes before the sustain point and that it has at most three locally stable equilibria for any given level of openness. The importance of the CP model’s rather awkward
assumption of myopic but infinitely- lived migrants is explored in Baldwin (2001).
That paper shows that allowing for forward- looking migrants and rational expectations has no effect on the break and sustain points, but it does change the model’s global stability properties. The essence of these two papers is summarised in Appendix B. Baldwin and Forslid (2000) solve the CP model allowing for
endogenous growth.
An important variant of the CP model is the so-called vertical linkages
version, due to Venables (1996) and Krugman and Venables (1995). In this alternative model, agglomeration is sustained by input-output relationships between firms and, importantly, it can arise even without inter-regional migration (so it may be easier to think of regions as nations rather than provinces). We call this the “VL model” and postpone its consideration to Chapter 8. An elegant synthesis of the CP and VL models can be found in Puga (1999).
Basic elements of the CP model are found in the broader location literature.
The struggle between dispersion and agglomeration forces is reminiscent of the spatial competition literature, which highlights a “price competition effect” (the desire to relax competition by locating far from other firms) and a “market area effect” (the desire to reduce trade costs by locating at the centre of the market). See, e.g., d’Aspremont et al. (1979). The CP model also can be thought of as extending to a general equilibrium setup the message of traditional models of firms location, i.e.
firms’ locational behaviour is either sluggish or catastrophic (see Ottaviano and
Thisse 2003). Likewise, the home market effect bears some strong resemblance to the
“Principle of Minimum Differentiation” in spatial competition à la Hotelling (1929).
The fact that agglomeration takes place when trade costs are low concurs with what has been shown in spatial oligopoly theory (see Irmen and Thisse 1998 for a synthesis of the historical literature). More generally, the kind of complementarity that produces agglomeration in the CP model is the hallmark of models of monopolistic
competition; see Matsuyama (1995) for a comprehensive analysis. Similar processes, however, have also been investigated in spatial competition theory when consumers are imperfectly informed about the characteristics of the products (Stahl 1987).
It is also worth noting that the dispersion force emphasised in the CP model is far from the only one that has been stressed in the literature. Some of these are
unrelated to trade openness, like non-tradable goods as in e.g. Helpman (1997) or comparative advantage as in e.g. Matsuyama and Takahashi (1998). Chapters 12 and 17 consider some of these.
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