The Core-Periphery Model Under Additively Separable Preferences

Abstract

This paper reexamines Krugman's core-periphery model by substituting his constant elasticity of substitution (CES) utility with a general additively separable utility that comprehensively captures the pro-competitive effect while preserving the income effect. The heterogeneous consumption patterns of skilled workers and unskilled workers introduce a demand adjustment effect. The resulting interaction <span>between</span> the dispersion force, driven by the pro-competitive effect and the demand adjustment effect, and the agglomeration force stemming from the “second nature,” leads to various possible location patterns. These comprehensive demand and supply linkages generate novel evolutionary paths and bifurcation diagrams. Notably, high trade costs do not always lead to complete dispersion, and free trade does not necessarily result in agglomeration. Furthermore, multiple phases of redispersion are also possible.