Agglomeration Economies

Agglomeration economies are a powerful force that help 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).

On 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 is composed of many unrelated commercial activities which 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) and having consumers combine multipurpose commercial trips into one (in addition to maximize the chances of impulse buying). The same rationale applies to logistics parks where distribution centers involved in very different supply chains locate to take advantage of common infrastructure and accessibility to transportation systems.