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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

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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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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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Find related papers by JEL classification:
F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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  16. repec:rus:hseeco:121669 is not listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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). [Downloadable!]
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  2. 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. [Downloadable!] (restricted)
    Other versions:
  3. Guillaume Daudin, 2007. "Domestic Trade and Market Size in Late Eighteen Century France," Documents de Travail de l'OFCE 2007-35, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
    Other versions:
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