Computable urban economic model incorporated with economies of scale for urban agglomeration simulation

Urban agglomeration has attracted attentions of urban planners, economists, and policymakers. For the sake of urban agglomeration simulation, this paper attempts to develop a computable urban economic (CUE) model incorporated with economies of scale, through the approach of new economic geography. It is assumed that each firm produces a product variant in a monopolistic competition market, and the number of firms is explicit and determined endogenously. The Dixit-Stiglitz type utility function with product variety is adopted into the households' behavior to reflect consumers' preference for variety. On the other hand, internal increasing returns to scale and fixed cost are introduced in firms' behavior to extend the model with economies of scale. The model's parameter estimations and calibration are conducted on the basis of empirical data from several approved sources for Changzhou in 2008. Numerical computations are implemented by employing the extended CUE model incorporated with economies of scale to explain and examine how the urban agglomeration comes into being. Simulation results show that the extended model incorporated with economies of scale is able to commendably represent the urban agglomeration mechanism, providing a promising simulation tool for urban planning and policymaking.