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Specialization vs Competition: An Anatomy of Increasing Returns to Scale

Author

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  • Alberto Bucci

    () (National Research University Higher School of Economics)

  • Philip Ushchev

    () (National Research University Higher School of Economics)

Abstract

We develop a two-sector model of monopolistic competition with a dierentiated intermediate good and variable elasticity of technological substitution. This setting proves to be well-suited to studying the nature and origins of external increasing returns. We disentangle two sources of scale economies: specialization and competition. The former depends only on how TFP varies with input diversity, while the latter is fully captured by the behavior of the elasticity of substitution across inputs. This distinction gives rise to a full characterization of the rich array of competition regimes in our model. The necessary and sucient conditions for each regime to occur are expressed in terms of the relationships between TFP and the elasticity of substitution as functions of the input diversity. Moreover, we demonstrate that, despite the folk wisdom resting on CES models, specialization economies are in general neither necessary nor sucient for external increasing returns to emerge. This highlights the profound and non-trivial role of market competition in generating agglomeration economies, endogenous growth, and other phenomena driven by scale economies.

Suggested Citation

  • Alberto Bucci & Philip Ushchev, 2016. "Specialization vs Competition: An Anatomy of Increasing Returns to Scale," HSE Working papers WP BRP 134/EC/2016, National Research University Higher School of Economics.
  • Handle: RePEc:hig:wpaper:134/ec/2016
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    References listed on IDEAS

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    More about this item

    Keywords

    External Increasing Returns; Variable Elasticity of Substitution; Specialization Eect; Competition Eect;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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