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Niche Firms, Mass Markets, and Income Across Countries: Accounting for the Impact of Entry Costs

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  • Pedro Bento

    (West Virginia University, College of Business and Economics)

Abstract

I develop a model of monopolistic competition in which I distinguish between niche markets and mass markets, in the spirit of Holmes and Stevens (2013). Firms choose between entering a small niche market with high markups or a large mass market with low markups. Entry costs have a much greater impact on output in the niche market as the gains to specialization are high, relative to the mass market where varieties are highly substitutable. Calibrated to match data from U.S. manufacturing, the model generates an elasticity of total factor productivity with respect to entry costs more than twice that in a model that abstracts from heterogeneous markets. I use data on entry costs across countries to show entry costs alone can account for half of the cross-country variation in productivity and income per worker, consistent with recent empirical estimates.

Suggested Citation

  • Pedro Bento, 2013. "Niche Firms, Mass Markets, and Income Across Countries: Accounting for the Impact of Entry Costs," Working Papers 13-11, Department of Economics, West Virginia University.
  • Handle: RePEc:wvu:wpaper:13-11
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pedro Bento, 2016. "Competition, Innovation, and the Number of Firms," Working Papers 20160608-001, Texas A&M University, Department of Economics.
    2. Kersting, Stefan & Hüttel, Silke & Odening, Martin, 2015. "Structural change in agriculture under capacity constraints: An equilibrium approach," Thuenen-Series of Applied Economic Theory 140, University of Rostock, Institute of Economics.
    3. Kersting, Stefan & Hüttel, Silke & Odening, Martin, 2016. "Industry dynamics under production constraints — The case of the EU dairy sector," Economic Modelling, Elsevier, vol. 55(C), pages 135-151.

    More about this item

    Keywords

    aggregate productivity; niche; mass market; entry costs; regulation;

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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