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Cost Reduction, Entry, and the Dynamics of Market Structureand Economic Growth

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  • Peretto, Pietro F.

Abstract

I study the joint determination of market structure and growth in an oligopolistic economy. Firms run in-house R&D programs to produce over time a continuous flow of cost-reducing innovations. In symmetric equilibrium, the relation between market structure and growth has two aspects. First, a larger number of firms induces fragmentation of the market and dispersion of R&D resources. This prevents exploitation of scale economics internal to the firm and slows down growth. Second, the number of firms changes with market and technology conditions and is endogenous. In particular, R&D spending is a fixed cost and there is a negative feed-back of the rate of growth on the number of firms. The explicit consideration of the interdependence of market structure and growth identifies a fundamental trade-off between growth and variety that produces interesting results. For example, the scale effect is bounded from above and converges to zero when the number of firms is large. Moreover, the market grows too little and supplies too much variety. This inefficiency is not due to technological externalities but to oligopolistic pricing and the interaction between R&D and entry decisions.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 95-48.

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Date of creation: 1995
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Publication status: Published in JOURNAL OF MONETARY ECONOMICS, Vol. 43, 1999, pages 173-195
Handle: RePEc:duk:dukeec:95-48

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Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/

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Cited by:
  1. Ying Fan & Menghui Li & Zengru Di, 2004. "Increasing Returns to Scale, Dynamics of Industrial Structure and Size Distribution of Firms," Papers cond-mat/0407383, arXiv.org.
  2. Murat F. Iyigun & X. Maggie Chen, 2004. "Strategic R&D Delays Generate Market Power," Econometric Society 2004 North American Summer Meetings 213, Econometric Society.

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