Abstract: By using with SDM model with spatial and time-period fixed effects and decomposition of spatial spillovers, this paper analyzes the relationship and mechanism of action effects between market potential, urbanization and agglomeration based on the new economic geography model about agglomeration economies. The result shows: market potential and urbanization promote agglomeration economies, and competition from neighboring regions exists. Through the decomposition of spillover effects of urbanization, we find that the three factors of urbanization have a positive impact on the development of agglomeration, but their mechanism is different. Specifically, population urbanization and economic urbanization have a positive role in agglomeration economies only through the direct effect. Furthermore, land urbanization facilitates the area itself and surrounding areas by the three effects. Finally, on the basis of empirical results, some related policy recommendations are put forward.

Key words: market potential, urbanization, agglomeration, spatial econometrics