Bigger is better: Market size, demand elasticity and innovation
AbstractThis paper proposes a novel mechanism whereby larger markets increase competition and facilitate process innovation. Larger markets, in the sense of more people or more open trade, support a larger variety of goods, resulting in a more crowded product space. This raises the price elasticity of demand and lowers mark-ups. Firms, therefore, become larger to break even. This facilitates process innovation as larger firms can amortize R&D costs over more goods. We demonstrate this mechanism in a standard model of process and product innovation. In doing so, we question some important results in the new trade and endogenous growth literatures.
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Bibliographic InfoPaper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2008-10.
Date of creation: 27 Oct 2008
Date of revision:
Publication status: Published International in Economic Review 51(2), May 2010: 319-333
Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the PROCIUDAD-CM Programme
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trade; population; price elasticity; competition; innovation; firm-size; scale effects; Dixit-Stiglitz; Hotelling;
Other versions of this item:
- Klaus Desmet & Stephen L. Parente, 2010. "Bigger Is Better: Market Size, Demand Elasticity, And Innovation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(2), pages 319-333, 05.
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-04 (All new papers)
- NEP-BEC-2008-11-04 (Business Economics)
- NEP-COM-2008-11-04 (Industrial Competition)
- NEP-CSE-2008-11-04 (Economics of Strategic Management)
- NEP-INO-2008-11-04 (Innovation)
- NEP-MIC-2008-11-04 (Microeconomics)
- NEP-TID-2008-11-04 (Technology & Industrial Dynamics)
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