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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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File URL: http://eprints.lse.ac.uk/51521/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 51521.

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Length: 53 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:ehl:lserod:51521
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