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An inverted-U relationship between product market competition and growth in an extended Romerian model

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  • Alberto BUCCI

Abstract

The influence of product market competition on growth is reconsidered by developing an extension of the basic Romerian model of horizontal product innovation. We find that the relationship between competition and growth is inverse-U shaped, provided that the non accumulated factor input (e. g. labour) is employed in each economic activity. We explain this result by the interplay between two effects. For low values of product market competition, the positive resource allocation effect (the effect that an increase of competition has on the sectoral distribution of labour) outweigh s the negative profit incentive effect (the effect that an increase of competition has on firms' incentive to innovate). When prod uct market competition is intense, the resource allocation and pr ofit incentive effects are both negative and reinforce each other in inducing a negative correlation between competition and growth

Suggested Citation

  • Alberto BUCCI, 2004. "An inverted-U relationship between product market competition and growth in an extended Romerian model," Departmental Working Papers 2004-026, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    • Handle: RePEc:mil:wpdepa:2004-026
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    More about this item

    Keywords

    Horizontal Differentiation; Product Market Competition; Technological Change; Endogenous Growth;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • 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
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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