Search costs generating industrial clusters

•This paper studies the formation of industrial clusters based on spatial competition and search costs.•This paper finds that the search cost is an extremely important factor in the formation of industrial clusters.•This work contributes analytical and theoretical insight into the theory of industrial clusters.

Multiple factors induce the formation of industrial clusters worldwide. This paper studies the formation of industrial clusters based on spatial competition and search costs in a game theoretic model. By establishing a spatial competition model, this paper compares firm profits under clustering to those without clustering. We find that search costs are an extremely important factor in the formation of industrial clusters that can give rise to industrial clusters in certain industries. This work contributes analytical and theoretical insights to the theory of industrial clusters.