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This article shows, using data from both the USA and the UK, that average plant size is larger in denser markets. However, many popular theories of agglomeration-spillovers, cost advantages and improved match quality-predict that establishments should be smaller in cities. The article proposes a theory based on monopsony in labour markets-firms in all labour markets have some market power but that they have less market power in cities-that can explain the stylized fact. It also presents evidence that the labour supply curve to individual firms is more elastic in larger markets, consistent with the monopsony hypothesis.
Alan Manning (Mon,) studied this question.