In recent years empirical studies on the New Economic Geography （NEG） model have been extensively implemented, while the NEG model has mainly advanced in theoretical extension.　A typical example of the empirical application of NEG is to estimate regional market potentials.

Redding and Venables proposed two types of regional market potential in an NEG model.　One being “Market Access” derived from market demand and the other “Supply Access” derived from supply capacity.　They estimated the trade equation with regional dummy variables.　Using the estimated results, they measured two regional market potentials.

In this study, we estimated the elasticity of substitution by industry without regional dummy variables in the trade equation.　The estimation of the elasticity of substitution by industry was made possible using data of 47 prefectural inter-regional input-output tables.　We found the degree of commodity differentials for industrial characteristics using the estimated results of the elasticity of substitution.　For example, the food and tobacco manufacturing industries have low differentials in commodity production, but the automobile industry has a high degree of differentials.

Using the estimated results of elasticity of substitution, we calculated regional market potentials by industry.　The elasticity of substitution affects the regional market potentials.　In other words, the degree of commodity differentials affects the regional market potentials.

Finally, we analyzed the relationships between wages and regional market potentials and found that the regional market potentials substantially affect regional wage variations.　Inter-regional transportation access improvements also have been found to affect wages through changes in regional market potentials.

JEL Classification: F12, R12