More than 25 years ago, Avinash Dixit and Joe Stiglitz developed a simple model for addressing imperfect competition and increasing returns (ICIR) in a general equilibrium setting. Its first application, in Dixit and Stiglitz (1977), was to an issue that now seems rather banal - whether the free markets produces too many or too few varieties of differentiated products. But ICIR considerations are so crucial to so many economic phenomena, and yet so difficult to model formally, that the Dixit-Stiglitz framework has become the workhorse of many branches of economics. In this paper, we present one of its most recent, and most startling applications - namely, to issues of economic geography. While there are many models in this new literature, almost all of them rely on Dixit-Stiglitz monopolistic competition, and among these, the most famous is the so-called core-periphery model introduced by Paul Krugman in a 1991 paper.
The basic structure of the core-periphery (CP) model is astoundingly familiar to trade economists. Take the classroom Dixit-Stigliz monopolistic-competition trade model with trade costs, add in migration driven by real wage differences, impose a handful of normalisations, and voila, the CP model! The fascination of the CP model stems in no small part from the fact that these seemingly innocuous changes so unexpectedly and so radically transform the behaviour of a model that trade theorists have been exercising for more than 25 years.
This paper presents the core-periphery model, or more precisely the version in Chapter 5 of Krugman, Fujita and Venables (1999) - FKV for short. We survey or describe all the main properties of the model including catastrophe, hysteresis, and global stability.