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Cost Reduction, Entry, and the Dynamics of Market Structureand Economic Growth


  • Peretto, Pietro F.


I study the joint determination of market structure and growth in an oligopolistic economy. Firms run in-house R&D programs to produce over time a continuous flow of cost-reducing innovations. In symmetric equilibrium, the relation between market structure and growth has two aspects. First, a larger number of firms induces fragmentation of the market and dispersion of R&D resources. This prevents exploitation of scale economics internal to the firm and slows down growth. Second, the number of firms changes with market and technology conditions and is endogenous. In particular, R&D spending is a fixed cost and there is a negative feed-back of the rate of growth on the number of firms. The explicit consideration of the interdependence of market structure and growth identifies a fundamental trade-off between growth and variety that produces interesting results. For example, the scale effect is bounded from above and converges to zero when the number of firms is large. Moreover, the market grows too little and supplies too much variety. This inefficiency is not due to technological externalities but to oligopolistic pricing and the interaction between R&D and entry decisions.

Suggested Citation

  • Peretto, Pietro F., 1995. "Cost Reduction, Entry, and the Dynamics of Market Structureand Economic Growth," Working Papers 95-48, Duke University, Department of Economics.
  • Handle: RePEc:duk:dukeec:95-48

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    References listed on IDEAS

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    Cited by:

    1. Ying Fan & Menghui Li & Zengru Di, 2004. "Increasing Returns to Scale, Dynamics of Industrial Structure and Size Distribution of Firms," Papers cond-mat/0407383,
    2. Murat F. Iyigun & X. Maggie Chen, 2004. "Strategic R&D Delays Generate Market Power," Econometric Society 2004 North American Summer Meetings 213, Econometric Society.

    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General


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