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Selection Effects with Heterogeneous Firms

  • Monika Mrázová
  • J. Peter Neary

We provide a general characterization of which firms will select alternative ways of serving a market. If and only if firms' maximum profits are supermodular in production and marketaccess costs, more efficient firms will select into the activity with lower market-access costs. Our result applies in a range of models and under a variety of assumptions about market structure. We show that supermodularity holds in many cases but not in all. Exceptions include FDI (both horizontal and vertical) when demands are "sub-convex" (i.e., less convex than CES), fixed costs that vary with access mode, and R&D with threshold effects.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1174.

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Date of creation: Oct 2012
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Handle: RePEc:cep:cepdps:dp1174
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