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Sunk Costs, Market Structure, and Growth

  • Peretto, Pietro F

The author presents a model of endogenous innovation where firms undertake in-house research and development (R&D). The concentration of sales and R&D resources determines the scale and efficiency of R&D operations and rate of productivity growth. In zero-profit equilibrium, R&D expenditure is one component of total fixed costs and determines the number of active firms. This feedback generates interdependent pricing, investment, and entry/exit decisions. The (jointly determined) rate of growth and number of firms supported in general equilibrium define the economy's balanced growth path. Multiple equilibria exist, and firms' expectations about rivalry determine the economy's performance. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 37 (1996)
Issue (Month): 4 (November)
Pages: 895-923

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Handle: RePEc:ier:iecrev:v:37:y:1996:i:4:p:895-923
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