Agglomeration economies are a powerful force that helps explain the advantages of the “clustering effect” of many activities ranging from retailing to transport terminals. There are three major categories of agglomeration economies:
- Urbanization economies. Benefits derived from the agglomeration of population, namely common infrastructures (e.g. utilities or public transit), the availability and diversity of labor, and market size.
- Industrialization economies. Benefits derived from the agglomeration of industrial activities, such as being their respective suppliers or customers. This favors the emergence of industrial clusters.
- Localization economies. Benefits derived from the agglomeration of a set of activities near a specific facility, let it be a transport terminal (logistics parks), a seat of government (lobbying, consulting, law), or a large university (technology parks).
In the above figure, three activities (P, Q, and R) having their respective locational constraints can benefit from agglomeration economies if they locate at A. The additional transport costs that may derive will be more than compensated by the cheaper functional linkages between the activities. For instance, a shopping mall comprises many unrelated commercial activities that would otherwise have their own location-based on specific factors, such as rent, accessibility, or market size. They substantially benefit from this clustering by sharing a common facility with many amenities (parking lots, public space, food courts) and having consumers combine multipurpose commercial trips into one (in addition to maximizing the chances of impulse buying, a highly profitable behavior for retail). The same rationale applies to logistics parks where distribution centers in very different supply chains are located to take advantage of common infrastructure and accessibility to transportation systems.