Industry cluster: spatial density and optimal scale

This paper studies the mechanism of industry cluster and revisits two cases of the Cambridge phenomenon. Based on the theoretical study and numeric simulation, the paper finds that: first, knowledge spillovers destroy normal Hotelling Process and lead to regional industry cluster. The density of cluster is inversely related to the damping of knowledge spillovers. Industry cluster is more likely to appear when the production cost is closer but still below the price of the product. Second, smaller companies are more likely to cluster than larger ones. Third, there is an optimal spatial scale, which is primarily determined by workers' wage, land rent, and the supply-demand relationship of land. The scale of a cluster cannot develop freely. Finally, labor-intensive firms and high-tech firms with less demand of land are more inclined to cluster, while traditional giant firms are less likely to do so.