Agglomeration Economies

Agglomeration economies consist of the profits that companies obtain from being located near each other. This, as a result of greater accessibility to various resources (tangible and intangible), which generates efficiencies.

That is, agglomeration economies refer to the benefits that companies receive as a result of the concentration in a given geographical area of ​​suppliers, consumers, competitors, investors, among others, all linked.

In other words, when two or more companies are located in the same area, they can share resources and knowledge. In this way, they generate synergies and increase the efficiency of their processes.

Key aspects of agglomeration economies

Among the key characteristics of agglomeration economies, the following stand out:

  • It is explained, in part, by a reduction in transport costs. Thus, it will be cheaper for companies to conduct transactions and organize meetings.
  • The concentration of companies allows economic agents to have access to a greater variety of goods and services.
  • They promote business generation and strategic alliances between organizations.
  • They encourage population growth. Therefore, the development of infrastructure to offer basic services such as health and education becomes more profitable.
  • To better understand the previous point, let’s imagine that a network of clinics is evaluating where to build a new headquarters. This project would not be attractive in a sparsely populated area because the frequency of patients would be low. On the other hand, in a city, the concurrence of people would be greater, so a great investment would be justified.
  • The dissemination of knowledge among economic agents is facilitated.
  • They are related to network effects. This phenomenon occurs when, to greater number of consumers, greater value or  utility  provides the good or service to the buyer.
  • It is linked to external economies of scalebecause, due to factors outside companies, they gain efficiency.

Example

A fact that exemplifies agglomeration economies is, in general, the growth of cities in recent decades. This, along with the decline in the rural population.

Urban areas have allowed not only the increase in trade, but the formation and concentration of human capital. This, as a result of the exchange of knowledge between people.

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