The objective of this paper is to investigate why cities have different sizes. Traditionally, this phenomenon has been explained by differences among cities in either the degree of internal scale economies or the elasticity of external economies. This paper relates size differences between cities to differences in the dominant agglomeration force between cities. We analyze this relationship via an equilibrium model of two cities that are embedded in a national economy. One of the cities produces two traded goods with urbanization economies being the dominant agglomeration force. The other city produces only one traded good with localization economies being the dominant force. Our first main result is that the two-product city can be larger than the one-product city in stable equilibrium, if at least one of the two industries exhibits decreasing returns in production. Otherwise, the one-product city is larger. Second, we obtain an existence result for the equilibrium of both cities. We also analyze the relationship between optimum sizes of the two cities using an optimum city size model for each city. Finally, we compare the equilibrium and optimum city sizes. By doing so we identify the condition under which the stable equilibrium city size is smaller than the optimum city size. © 1990.
