Bigger is better: Market size, demand elasticity and innovation
This paper proposes a novel mechanism whereby larger markets increase competition and facilitate process innovation. Larger markets, in the sense of more people or more open trade, support a larger variety of goods, resulting in a more crowded product space. This raises the price elasticity of demand and lowers mark-ups. Firms, therefore, become larger to break even. This facilitates process innovation as larger firms can amortize R&D costs over more goods. We demonstrate this mechanism in a standard model of process and product innovation. In doing so, we question some important results in the new trade and endogenous growth literatures.
|Date of creation:||27 Oct 2008|
|Date of revision:|
|Publication status:||Published International in Economic Review 51(2), May 2010: 319-333|
|Note:||This paper is included in the IMDEA Social Sciences Working Paper Series through the PROCIUDAD-CM Programme|
|Contact details of provider:|| Postal: |
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