Based on the service industry of 16 cities in Yangtze River Delta from 2002 to 2012, this paper analyzes the spatial evolution of agglomeration economy and its effect on industrial structure upgrading. Scatter Plot study reveals that there exists a spatial correlation about the effect of agglomeration economy on service industry of Yangtze River Delta. Conditional Plot study finds there exists regional difference about the effect of agglomeration economy on industrial structure. Static Panel regression analysis finds the effect of localization economy is significantly positive，but urbanization economy is significantly negative. Dynamic Panel regression analysis finds that the localization economy has a cumulative effect on industrial structure upgrading, while the effect of the urbanization economy is negative.