Industrial Cluster, Similarity, and External Economies

Zhan CAO, Qian CHEN


This paper develops a simple model in which external economies are caused by interconnectedness among firms in intracluster and intercluster. Two main results are developed. First, the larger the elasticity of substitution between any two products produced within the cluster, the larger the cluster’s output; second, a cluster with larger elasticity of substitution yields larger output among different clusters other things being equal.


Cluster, Similarity, External economies

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