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  • We thank Mark Partridge (the editor), three anonymous referees, Rainald Borck, Gilles Duranton, Masahisa Fujita, Pierre Picard, Jacques-Francois Thisse and seminar participants in Dortmund, Halle and Savannah for very helpful comments and suggestions. Parts of this paper were written while Pflüger was visiting IZA. He gratefully acknowledges the hospitality of this institution. All errors are solely our responsibility.

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ABSTRACT The core-periphery model of the new economic geography has two “dramatic” implications: catastrophic agglomeration and locational hysteresis around the symmetry breaking level of trade freeness. In this note, we study a generalized version of this model with constant elasticity of substitution (CES) instead of Cobb-Douglas upper tier preferences. The possibility of a continuous and easily reversible transition from symmetry to agglomeration now arises. One of the most prominent results of the new economic geography literature—the catastrophic consequences of small parameter changes—therefore, hinges crucially on specific functional forms for consumer preferences.