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Bigger is better: Market size, demand elasticity and innovation

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  • Klaus Desmet

    ()
    (Universidad Carlos III de Madrid)

  • Stephen L. Parente

    ()
    (University of Illinois)

Abstract

This 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 Info

Paper provided by Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales in its series Working Papers with number 2008-10.

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Date of creation: 27 Oct 2008
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Publication status: Published International in Economic Review 51(2), May 2010: 319-333
Handle: RePEc:imd:wpaper:wp2008-10

Note: This paper is included in the IMDEA Social Sciences Working Paper Series through the PROCIUDAD-CM Programme
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Related research

Keywords: trade; population; price elasticity; competition; innovation; firm-size; scale effects; Dixit-Stiglitz; Hotelling;

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Cited by:
  1. Klaus Desmet & Stephen L. Parente, 2009. "The evolution of markets and the revolution of industry: A unified theory of growth," Working Papers 2009-06, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
  2. Chiara Criscuolo & Peter N. Gal & Carlo Menon, 2014. "The Dynamics of Employment Growth: New Evidence from 18 Countries," CEP Discussion Papers dp1274, Centre for Economic Performance, LSE.
  3. Adelheid Holl & Rafael Pardo & Ruth Rama, 2011. "Spatial patterns of adoption of just-in-time manufacturing," Working Papers 1101, Instituto de Políticas y Bienes Públicos (IPP), CSIC.
  4. Lei Fang, 2009. "Entry barriers, competition, and technology adoption," Working Paper 2009-08, Federal Reserve Bank of Atlanta.
  5. Gonzalo F. Forgues-Puccio & Ibrahim M. Okumu, 2012. "Does Size Matter? Scale, Corruption and Uncertainty," CDMA Working Paper Series 201207, Centre for Dynamic Macroeconomic Analysis.
  6. Klaus Desmet & Stephen Parente, 2014. "Resistance to Technology Adoption: The Rise and Decline of Guilds," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 437-458, July.
  7. M. Battisti & F. Belloc & M. Del Gatto, 2012. "Unbundling technology adoption and tfp at the firm level. Do intangibles matter?," Working Paper CRENoS 201233, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  8. Hélène Latzer & Florian Mayneris, 2011. "Trade in quality and income distribution: an analysis of the enlarged EU market," Working Papers of BETA 2011-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  9. Desmet, Klaus & Parente, Stephen, 2009. "The Evolution of Markets and the Revolution of Industry: A Quantitative Model of England's Development, 1300-2000," CEPR Discussion Papers 7290, C.E.P.R. Discussion Papers.
  10. Massimiliano Bratti & Giulia Felice, 2012. "Are Exporters More Likely to Introduce Product Innovations?," The World Economy, Wiley Blackwell, vol. 35(11), pages 1559-1598, November.

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