Agglomeration Economies

By clustering in close proximity to one another, firms can lower their production costs and raise profits. This process is enormously important to many forms of production and is titled agglomeration economies—that is, the benefits derived from grouping together. By forming dense webs of production and embedding themselves within them, firms usually can produce more efficiently and profitably.

Agglomeration economies take several forms. Production linkages accrue to firms locating near producers that manufacture their inputs. By clustering, transportation and assembly costs are reduced. Service linkages occur when enough firms locate in one area to avail themselves of specialized support services. For example, the advertising industry in New York is concentrated within a short distance of Madison Avenue, investment banks form a dense wad in southern Manhattan, ...