An Evaluation Of Agglomeration Economics

"There are a variety of advantages which may be enjoyed by companies who find near other companies. These advantages are known as agglomeration economics or external economies of size. " (Helsley 2003) These advantages are known as exterior because they do not arise from the business itself, but from the external environment. Similar businesses that discover close to one another can produce more efficiently and at a lower cost because of the ability to specialize, access to resources, decrease in transportation and usage of knowledge and information.

Two types of areas which may have benefited from the agglomerating of economies are the oil and gas industry in Alberta and the Vehicle industry in Detroit. These market sectors arose in their specific locations for different reasons but both share the normal conditions of economies of scale and agglomeration economics. Both of these industries take benefit of the locations by producing more effectively and maximizing gains.

The Petrol Industry in Alberta

The most renowned oil breakthrough in Alberta that basically propelled the industry was created by Imperial Petrol 1n 1947 when they struck oil near Leduc. (ucalgary. ca) Essential oil was however learned in Alberta much before then. Inside the 1910's a farmer at Okotoks uncovered gas and then later in the 1930's engine oil was discovered beneath the gas fields. Due to these two discoveries international oil companies began operations in Alberta, and in 1923 and 1939 Imperial Engine oil and Uk America Olive oil built refineries in Calgary. In 1938 the Alberta administration create the Alberta ENERGY SAVING Plank in 1938, this led just how for Calgary's development to be the main administration middle for the oil and gas industry in Alberta. These early on discoveries helped change Alberta in one of the poorest provinces in the Nation in to the multibillion buck empire that it's today. The reason that the oil and gas industry resolved in Alberta was because of geographic location, this is where the majority of the coal and oil in the state resides. Because this industry is based on extraction and control of a natural resource it needed to locate where the resource is. However administration policy in addition has helped form the industry. Authorities plan, both at the provincial and federal levels have impacted the coal and oil overall economy. Like I previously mentioned the provincial administration in 1938 set of the AECB and this selected Calgary as the key administrative mind for the industry. Recently other authorities programs have also helped form the industry by checking markets and access to labor, NAFTA is an exemplory case of this.

Once the industry starts off growing it generates many positive externalities that fuel the responses loop which in turn grows the market some more. There are now several regions of the province which have specialized even further and are now finding their own agglomeration economics some examples of this are the coal and oil headquarters in downtown Calgary and Alberta's Industrial Heartland north east of Edmonton. This area consists of many companies specializing in the petro chemical industry. These companies locating in close closeness greatly reduces their pipe collection costs because they can all show one major pipeline and then just build minimal lines to each of these vegetation. In Calgary having so many companies in close proximity greatly escalates the acceleration to which marketing communications and knowledge can be transferred and it also greatly reduces search charges for companies looking for skilled labor. Having the oil industry targeted in Alberta has also helped in greatly increasing research and training programs for the industry. Much of it has been developed out of necessity because extraction is now increasingly more difficult and companies need to specialize further and further, directional drilling and the olive oil sands are examples of this.

The petrol industry is continuing to grow into one of the most influential areas in the state, and has left Alberta, with its newly found financial security to be adored. There are numerous factors such as a stable government, authorities programs and incentives and new knowledge and technology which may have all helped shape the industry into what it now is. However it is impossible to over look the obvious proven fact that the industry is located where for the reason that of usage of the valuable tool beneath Alberta's soils. Alberta has been able to build this powerful agglomerated overall economy because of the simple fact that the province consists of massive reserves whether they be shallow gas or the Petrol Sands of Fort McMurray.

Detroit's Auto Industry

Detroit or "Motown" is the leading Vehicle maker in america. It was not always this way however. The first gas power automobile was produced is Springfield Massachusetts in 1896. The first automobile to be built in Detroit was made by Olds in 1899. But by 1904 42% of automobiles were built in Detroit and then by 1914 this number increased to 78%. (McDonald 2007) From 1900 to 1930 the population of Detroit grew swiftly from 305 000 to 1 1 837 000 people this is greatly related to the fact that by 1929 the Vehicle Mobile industry in Detroit was the major industry in the united states. In 1909 there have been over 200 automobile manufacturers in america this number however dropped speedily until it was basically just the three structured out of Detroit; Standard Motors, Ford and Chrysler. There are a few other factors that some have added to the successes of Detroit, such as the undeniable fact that Detroit is a significant shipping port which would provide them with access to cheap travel of fresh resources, parts and marketplaces. While geographic location may have played out a role in the Auto industry in Detroit it is more popular that it is not really a key factor in Detroit's success. (Klepper 2001) The main reason is just the fact of Agglomeration Economics. Early on automobile manufacturers were create all over the county, the ones that became the most successful just happened to be those that were set up in close proximity.

Detroit already possessed a delivery industry which designed that there is already skilled technicians that recognized gas machines, this offered the automobile industry access to these skills. There was also already manufacturers set up that could build engines and parts. Because there have been so many manufacturers in close proximity this is were people started moving to find work, because with so many companies close collectively it created the highest odds of finding employment. There is also spill over knowledge that others could learn from, such as Henry Fords famous technology the assembly collection. This greatly diminished cost and increase the time in which an auto could be produced. In 1910 it is stated that the assembly line lowered the price to create one Model T from $780 - $360. (McDonlad) After the other manufactures in Detroit saw the fantastic success of this they soon implemented assemblage lines.


There are many benefits to businesses that relocate to a place where there can be an agglomerating economy. The best obvious benefits is economies of range. When an industry develops large enough companies commence to specialize. Whenever a market is large enough and companies begin to concentrate then costs are reduced. Within the car industry if there are part manufacturers and that is all they focus on then the auto manufactures may be able to buy products such as bearings for under they could produce them internally. Or for say the engine oil industry there could be some kind of drilling problem and a corporation requires a special piece of machinery, it generally does not make since to allow them to buy it first problem but there is probably another company that has specialized in that little bit of machinery so it is cheaper just to hire them. Creation costs are also greatly reduced in an agglomerated market due to a reduction in transport costs, both of people and material. In the case of the Industrial Heartland they can all share pipeline costs instead of having to all build their own, this greatly reduces costs. Aswell when there is enough industry situated in an area it also could become more economical to truly have a rail line devote. As well it makes more sense to own refineries built-in Alberta because this is where the oil creation is so that it saves on shipping raw resources. As well in both cases it greatly reduces on the expense of the transfer of knowledge. When an automobile company has a fun new idea or a production technique and you simply are located near them, then your likely hood of finding out about the idea and benefiting from it is much higher. Aswell in either instance if you are having issues and need help there is most likely someone near you that has had experience dealing with this issue, or there could be specialised think tanks setup for the industry. When you are working in an area that is very technological it's important to have access to the best brains and new technology. Aswell when you have all this knowledge and experience at your finger tips it generally does not feel like you're alone, you will work under years of earlier experience that has greatly reduced the chance for your business in the industry. In cases like this there is a major advantage in comparison to someone opening a business a long way away from the major section of influence.

As well as there being benefits to the business and industry as a hole there's also advantages of agglomerated economies for employees. For example if you were searching for a job within an automobile factory, you'll prefer to visit a city where that are 5 factories then go to a city with only 1, your chances of successfully finding a job increase if there will be more possible positions. Aswell when there are more jobs within an area a worker can pick and choose and find the positioning that most tightly matches his / her expertise and desires. If there are more jobs this can also increase opportunities for an employee to leave and go and benefit the competitor this causes employers to have to increase pay or working conditions to be able to retain their employees. A couple of other positive externalities along with this, once workers learn to concentrate within an area then other amenities such as restaurants and stores will follow.

Agglomeration, however, may have a few downsides. It may cause a location to become to undiversified, such as Alberta we just just lately witnessed that a drop in the price of oil causes a relapse in the entire province. Or for Michigan a drop in Vehicle production has triggered a collapse in almost the complete city. Since 2000 there's been a decrease of over a half million jobs in Detroit it has left vast regions of metropolis vacant and there is even complete office structures in Detroit's downtown which have been left vacant. Aswell there is a term called "dissagglomeration" (Fritzgerald 200) In this instance a region becomes so successful it loses its cost savings appeal. An example of this is when it becomes so competitive in an area it drives real estate prices so high that this becomes no more economical to locate in that area. This has become evident for many staff in Alberta, housing prices have skyrocketed in areas such as Calgary's downtown and employees will have to make major commutes. Aswell along with booming business and successful employees comes the proliferation of crime and human denseness increases and congestion.


In respect to both types of agglomeration used above they have affected their individual regions in another way. Alberta's oil patch is booming additionally there can be an plethora of well paying jobs. We've seen an increase in the amount of technical engineers and other informed students want to enter this field, however we have seen an even larger quantity of students either drop out of senior high school or go right from senior high school to the oil industry because education is not needed in order to obtain a well paying job. So, over all there appears to have been a decrease in the value of any post extra education. There has also been a rise in movements of Canada's uneducated into Alberta to find jobs. The population thickness in Alberta has dramatically increased because of the Oil industry and this has brought problems such as pollution with it. However, even though there are some drawbacks the Oil and gas Industry definitely needs to be related to the financial success and countrywide importance of Alberta.

In Detroit however it seems to be a different story. Historically the impacts would seem to get been the same, Detroit was highly successful captivated a lot of employees and could have been extremely nationally important because it was contributing a lot to the economy. Now however Detroit appears to be dying. The reason for this is the slowdown in the Auto industry. The crash of the Auto industry cannot be linked to agglomeration, the crash of Detroit however can be partially. Because of agglomeration Detroit didn't diversify its current economic climate very well the Auto sector looked too powerful and profitable to worry, now however with the decelerate, we are experiencing massive layoffs and vacant homes.

Part 2


This clustering of businesses would be considered examples of agglomeration economies. However I feel that not to the same scope, because they would not experience as much benefits as the agglomeration of a whole industry. They certainly however reduce some costs and also have some benefits. By clustering business can better monitor market trends, screen their competition, as well they might be in a position to cluster in conditions of safety and to help watch and shield each others products and lots. The big advantage though is a multiple of stores can better catch the attention of customers a solo store off alone. By clustering consumers can spend less on travelling and they'll be more likely to visit the location with the most stores for shopping simplicity. Because of the scale there are a few benefits that I feel they do not get to experience, such as a decrease in set up costs and a decrease in raw materials costs. Two types of this type of agglomeration would be the Auto Mile in Wetaskiwin Alberta;

A - Toyota City

B - Pioneer Chrylser Jeep

D - Schwabs Chevrolet

F - Denham Ford Sales

G - Spruce View Motors

H - Union Motors

As well as bars along the "red mile" in Calgary, 17th ave sw;

Left to Right:

Morgans Pub

Mugs Restauraunt

Beckham's Pub

Watchman's Delivery

Red Mile Creamery & Desserts

Melrose Caf & Bar

Ship & Anchor Pub

Bob the Seafood Tavern

Rose & Crown Pub

The Car Mile in Wetaskiwin established fact and is recognized by its own Advertisements "Cars cost less in Wetaskiwin". This shows that the region is not only known for an individual dealership, it is known since there is many dealerships along and that allures business. As well it's the same for the Red Mile customers want to go and walk down 17th ave since there is a great deal of pubs and restaurants. Since there is a variety it appeals to more customers then if there have been just one single business, even though whenever there are many businesses they will have to remain competitive for business.


Harold Hotellings model is situated mostly on transportation costs and price. Instead of positive externalities of being hand and hand. Hotelling assumes that customers choose were to acquire their product predicated on the price tag on the good plus vehicles, add these alongside one another and pick the less expensive. Because of this firms will setup in the same central location to increase exposure and prevent being put between two other stores and getting squeezed out. Relating to Hotelling companies choose their location structured strictly on maximizing the amount of men and women in their area in accordance with your competition. Two examples of this are Fast Food restaurants and gasoline stations. In both these conditions competitors either tend to be part by or across the street from one another. So even though in both these cases it is the firms locating close to one another it is ideal for very different reasons. In the Hotelling theory organizations cluster for competitive reasons and in agglomeration economics they cluster for the economical benefits and economies of scale.


Benefitting from clustering or not is most probably an instance by case situation. You won't be the same for all types of industries and can have to be calculated on a case by case basis. No matter what the situation, competition will increase by clustering which should lower prices. Inside the Hotteling model the lowered prices are offset by the increased customer platform that clustering creates so that it all depends on whether or not this will indeed offset the reduced prices. Agglomeration economies on the other hands benefit from reduced costs, higher people, information etc. In agglomeration economics the huge benefits are always supposedly positive often they would not keep true and business would relocate to be near to each other. The Hotelling model is dependant on competiveness while agglomeration economics derive from maximizing advantage.


I assume that whether or not firms cluster and how they reap the benefits of it or not is basically reliant on what level of the economy they may be in and what type of good. It could seem that manufacturing level firms would reap the benefits of clustering through agglomeration economics. They are the firms such as coal and oil refineries and car manufacturing. They may have highly substitutable products and they do not market to the finish consumer, and for that reason would greatly take advantage of the reduced costs. Where as a business like the clothing stores market right to the finish consumer and therefore benefit from increased coverage and differentiation and for that reason benefit from clustering through the Hotelling model. The areas in a city where this type of clustering occurs are normally high traffic areas with many individuals.

In conditions of agglomeration economics I really do not feel that a large anchor tenant is required, these businesses aren't looking for attention they are simply just wanting to produce at an inexpensive. Where as within an area with clusters of consumer goods stores, an anchor tenant may be helpful. But I do not know if it would be necessary. If for occasion a huge store may well not need to be in a cluster, they might draw in enough attention independently and folks will travel, where as if you a minor store then you almost certainly would need to be a cluster to entice business to your store.

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