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

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  • Desmet, Klaus
  • Parente, Stephen

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

  • Desmet, Klaus & Parente, Stephen, 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
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    1. repec:spo:wpecon:info:hdl:2441/2241 is not listed on IDEAS
    2. repec:spo:wpecon:info:hdl:2441/b0ghejdpldro9c499h4ajc937 is not listed on IDEAS
    3. Guillaume Daudin, 2010. "Domestic Trade and Market Size in Late 18th century France," Sciences Po publications info:hdl:2441/b0ghejdpldr, Sciences Po.
    4. Daudin, Guillaume, 2010. "Domestic Trade and Market Size in Late-Eighteenth-Century France," The Journal of Economic History, Cambridge University Press, vol. 70(03), pages 716-743, September.
    5. 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.

    More about this item

    Keywords

    imperfect competition; Lancaster preferences; market size; technology adoption;

    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

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