IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/5825.html
   My bibliography  Save this paper

Bigger is Better: Market Size, Demand Elasticity and Resistance to Technology Adoption

Author

Listed:
  • Parente, Stephen
  • Desmet, Klaus

Abstract

This paper's hypothesis is that larger markets facilitate the adoption of more productive technology by raising the price elasticity of demand for a firm's product. A larger market, either because of population or free trade, thus implies a larger increase in revenues following the price reduction associated with the introduction of a more productive technology. As a result, technology adoption is more profitable, and the earnings of factor suppliers are less likely to be adversely affected. Firms operating in larger markets, therefore, have a greater incentive to adopt more productive technologies, and their factor suppliers have a smaller incentive to resist these adoptions. This is the case even when there is no fixed resource cost to adoption. We demonstrate this mechanism numerically and provide empirical support for this theory.

Suggested Citation

  • Parente, Stephen & Desmet, Klaus, 2006. "Bigger is Better: Market Size, Demand Elasticity and Resistance to Technology Adoption," CEPR Discussion Papers 5825, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5825
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP5825
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    2. Romain Wacziarg & Karen Horn Welch, 2008. "Trade Liberalization and Growth: New Evidence," The World Bank Economic Review, World Bank, vol. 22(2), pages 187-231, June.
    3. Yeaple, Stephen Ross, 2005. "A simple model of firm heterogeneity, international trade, and wages," Journal of International Economics, Elsevier, vol. 65(1), pages 1-20, January.
    4. Enrico Spolaore & Alberto Alesina & Romain Wacziarg, 2000. "Economic Integration and Political Disintegration," American Economic Review, American Economic Association, vol. 90(5), pages 1276-1296, December.
    5. Giorgio Bellettini & Gianmarco I. P. Ottaviano, 2005. "Special Interests and Technological Change," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(1), pages 43-56.
    6. Per Krusell & José-Víctor Ríos-Rull, 1996. "Vested Interests in a Positive Theory of Stagnation and Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(2), pages 301-329.
    7. Marc J. Melitz & Giancarlo I. P. Ottaviano, 2021. "Market Size, Trade, and Productivity," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 4, pages 87-108, World Scientific Publishing Co. Pte. Ltd..
    8. Holmes, Thomas J. & Jr., James A. Schmitz, 2001. "A gain from trade: From unproductive to productive entrepreneurship," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 417-446, April.
    9. Gianmarco Ottaviano & Takatoshi Tabuchi & Jacques-François Thisse, 2021. "Agglomeration And Trade Revisited," World Scientific Book Chapters, in: Firms and Workers in a Globalized World Larger Markets, Tougher Competition, chapter 3, pages 59-85, World Scientific Publishing Co. Pte. Ltd..
    10. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    11. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1181-1222, December.
    12. Edward C. Prescott & Stephen L. Parente, 1999. "Monopoly Rights: A Barrier to Riches," American Economic Review, American Economic Association, vol. 89(5), pages 1216-1233, December.
    13. Martin Neil Baily & Hans Gersbach, 1995. "Efficiency in Manufacturing and the Need for Global Competition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995 Micr), pages 307-358.
    14. Jeffrey R. Campbell & Hugo A. Hopenhayn, 2005. "Market Size Matters," Journal of Industrial Economics, Wiley Blackwell, vol. 53(1), pages 1-25, March.
    15. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    16. repec:rus:hseeco:121669 is not listed on IDEAS
    17. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 71-102, October.
    18. Joel Mokyr, 2005. "The Great Synergy: The European Enlightenment as a Factor in Modern Economic Growth," 2005 Meeting Papers 179, Society for Economic Dynamics.
    19. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
    20. Rodrigues, Mauro, 2010. "Import substitution and economic growth," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 175-188, March.
    21. Francisco Rodríguez & Dani Rodrik, 2001. "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 261-338, National Bureau of Economic Research, Inc.
    22. Barron, John M. & Umbeck, John R. & Waddell, Glen R., 2008. "Consumer and competitor reactions: Evidence from a field experiment," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 517-531, March.
    23. Berthold Herrendorf & Arilton Teixeira, 2005. "How Barriers to International Trade Affect TFP," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 866-876, October.
    24. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Multiproduct Firms, Product Differentiation, and Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    25. David Hummels & Volodymyr Lugovskyy, 2005. "Trade in Ideal Varieties: Theory and Evidence," NBER Working Papers 11828, National Bureau of Economic Research, Inc.
    26. Thomas J. Holmes & James A. Schmitz, 1994. "Resistance to technology and trade between areas," Staff Report 184, Federal Reserve Bank of Minneapolis.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kevin H. O'Rourke, Leandro Prados de la Escosura and Guilllaume Daudin, 2008. "Trade and Empire, 1700-1870," The Institute for International Integration Studies Discussion Paper Series iiisdp249, IIIS.
    2. Daudin, Guillaume, 2010. "Domestic Trade and Market Size in Late-Eighteenth-Century France," The Journal of Economic History, Cambridge University Press, vol. 70(3), pages 716-743, September.
    3. repec:spo:wpecon:info:hdl:2441/2241 is not listed on IDEAS
    4. repec:hal:spmain:info:hdl:2441/b0ghejdpldro9c499h4ajc937 is not listed on IDEAS
    5. repec:spo:wpecon:info:hdl:2441/b0ghejdpldro9c499h4ajc937 is not listed on IDEAS
    6. repec:hal:spmain:info:hdl:2441/6149 is not listed on IDEAS
    7. repec:spo:wpecon:info:hdl:2441/6149 is not listed on IDEAS
    8. repec:spo:wpmain:info:hdl:2441/b0ghejdpldro9c499h4ajc937 is not listed on IDEAS
    9. repec:hal:wpspec:info:hdl:2441/b0ghejdpldro9c499h4ajc937 is not listed on IDEAS
    10. repec:spo:wpmain:info:hdl:2441/2241 is not listed on IDEAS
    11. Azele Mathieu & Bruno van Pottelsberghe de la Potterie, 2010. "A Note on the Drivers of R&D Intensity," Research in World Economy, Research in World Economy, Sciedu Press, vol. 1(1), pages 56-65, November.
    12. Tomasz Serwach, 2012. "Why Learning by Exporting May Not Be As Common As You Think and What It Means for Policy," International Journal of Management, Knowledge and Learning, International School for Social and Business Studies, Celje, Slovenia, vol. 1(2), pages 157-172.
    13. repec:hal:wpspec:info:hdl:2441/2241 is not listed on IDEAS
    14. repec:spo:wpmain:info:hdl:2441/6149 is not listed on IDEAS
    15. repec:hal:spmain:info:hdl:2441/2241 is not listed on IDEAS
    16. repec:hal:wpspec:info:hdl:2441/6149 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 1-54, Elsevier.
    2. Klaus Desmet & Stephen L. Parente, 2006. "Market Size, Trade, and the Resistance to the Adoption of Better Technology," 2006 Meeting Papers 264, Society for Economic Dynamics.
    3. Xavier Vives, 2008. "Innovation And Competitive Pressure," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 419-469, December.
    4. Capolupo, Rosa, 2009. "The New Growth Theories and Their Empirics after Twenty Years," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-72.
    5. Hexian Wang & Wei Liu & Mengyuan Zhu & Qing Wang, 2018. "Embrace or Not? An Empirical Study of the Impact of Globalization on the Country’s Sustainability in the Case of NAFTA," Sustainability, MDPI, vol. 10(10), pages 1-16, September.
    6. Igor D. Livshits & James C. MacGee, 2008. "Barriers to Technology Adoption and Entry," University of Western Ontario, Economic Policy Research Institute Working Papers 20087, University of Western Ontario, Economic Policy Research Institute.
    7. T. Gries & R. Grundmann & I. Palnau & M. Redlin, 2017. "Innovations, growth and participation in advanced economies - a review of major concepts and findings," International Economics and Economic Policy, Springer, vol. 14(2), pages 293-351, April.
    8. Duranton, Gilles & Puga, Diego, 2014. "The Growth of Cities," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 5, pages 781-853, Elsevier.
    9. Berthold Herrendorf & Arilton Teixeira, 2005. "How Barriers to International Trade Affect TFP," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 866-876, October.
    10. Peter Gustafsson & Paul Segerstrom, 2010. "Trade Liberalization and Productivity Growth," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 207-228, May.
    11. 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.
    12. Lei Fang, 2017. "Entry Barriers, Competition, And Technology Adoption," Economic Inquiry, Western Economic Association International, vol. 55(2), pages 794-805, April.
    13. Pengfei Wang & Danyang Xie, 2018. "Trade, Sectorial Reallocation, and Growth," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 49-74, May.
    14. Roberto Álvarez & Ricardo A. López, 2008. "Trade Liberalization and Industry Dynamics: A Difference in Difference Approach," Working Papers Central Bank of Chile 470, Central Bank of Chile.
    15. Klaus Desmet & Stephen Parente, 2012. "The evolution of markets and the revolution of industry: a unified theory of growth," Journal of Economic Growth, Springer, vol. 17(3), pages 205-234, September.
    16. Giordano Mion & Paolo Naticchioni, 2009. "The spatial sorting and matching of skills and firms," Canadian Journal of Economics, Canadian Economics Association, vol. 42(1), pages 28-55, February.
    17. Bridgman, Benjamin R. & Livshits, Igor D. & MacGee, James C., 2007. "Vested interests and technology adoption," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 649-666, April.
    18. Aleksandra Parteka, 2013. "The role of trade in intra-industry productivity growth - the case of old and new European Union countries (1995-2007)," GUT FME Working Paper Series A 1, Faculty of Management and Economics, Gdansk University of Technology.
    19. Benjamin R. Bridgman & Igor D. Livshits & James C. MacGee, 2004. "For Sale: Barriers to Riches," University of Western Ontario, Economic Policy Research Institute Working Papers 20043, University of Western Ontario, Economic Policy Research Institute.
    20. Aleksandra Parteka, 2013. "The Role of Trade in Intra-Industry Productivity Growth—the Case of Old and New European Union Countries," Review of Development Economics, Wiley Blackwell, vol. 17(4), pages 712-731, November.

    More about this item

    Keywords

    Market size; Technology adoption; Imperfect competition; Lancaster preferences;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:5825. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.