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Bigger is Better: Market Size, Demand Elasticity and Resistance to Technology Adoption

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Author Info

  • Desmet, Klaus
  • Parente, Stephen

Abstract

This paper's hypothesis is that larger markets facilitate the adoption of more productive technology by raising the price elasticity of demand for a firm's product. A larger market, either because of population or free trade, thus implies a larger increase in revenues following the price reduction associated with the introduction of a more productive technology. As a result, technology adoption is more profitable, and the earnings of factor suppliers are less likely to be adversely affected. Firms operating in larger markets, therefore, have a greater incentive to adopt more productive technologies, and their factor suppliers have a smaller incentive to resist these adoptions. This is the case even when there is no fixed resource cost to adoption. We demonstrate this mechanism numerically and provide empirical support for this theory.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5825.

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Date of creation: Sep 2006
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Handle: RePEc:cpr:ceprdp:5825

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Related research

Keywords: imperfect competition; Lancaster preferences; market size; technology adoption;

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References

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Citations

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Cited by:
  1. Daudin, Guillaume, 2010. "Domestic Trade and Market Size in Late-Eighteenth-Century France," The Journal of Economic History, Cambridge University Press, vol. 70(03), pages 716-743, September.
  2. Guillaume Daudin, 2007. "Domestic trade and market size in late eighteenth century France," Sciences Po publications n°2007-35, Sciences Po.
  3. Mathieu, Azèle & van Pottelsberghe, Bruno, 2008. "A Note on The Drivers of R&D Intensity," CEPR Discussion Papers 6684, C.E.P.R. Discussion Papers.
  4. Guillaume Daudin & Kevin H. O’Rourke & Leandro Prados de la Escosura, 2008. "Trade and Empire, 1700-1870," Documents de Travail de l'OFCE 2008-24, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. Guillaume Daudin, 2010. "Domestic Trade and Market Size in Late 18th century France," Sciences Po publications info:hdl:2441/b0ghejdpldr, Sciences Po.

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