Intermediate goods and the location of productive activity

This paper assesses the impact of the production and use of an intermediate good upon the location of productive activity in an economy consisting of two asymmetrically sized regions. The Nash equilibria of locations of an upstream and two downstream firms are completely defined in the the space of parameters ‘‘transport cost’’ and ‘‘intensity of vertical linkages’’. While the relationship between transport cost and agglomeration is usually regarded as a decreasing one, the inclusion of an intermediate good can make it nonmonotonic.