Agglomeration and taste heterogeneity. Equilibria, stability, welfare and dynamics

The spatial concentration of economic activity is modeled as a tag-of-war between consumer taste heterogeneity for location and external production benefits from the agglomeration of firms at the same location. The existence, number, stability and welfare of general equilibria are fully examined for a simple system of two regions which are identical a priori. When agglomeration effects are negligible at small sizes, the two locations grow equally until a critical bifurcation results in the accelerated growth of one location which ultimately attracts all activity. The supercritical bifurcation characterizes the case of agglomeration effects which are initially strong but become fully exhausted with size. In this case concentration occurs at the final phases of a decline process which exhibits a hysteresis effect relative to the opposite growth process. Both growth and decline involve middle cycles of non-equilibrium and stochastically sparked adjustment.