BIGGER IS BETTER: MARKET SIZE, DEMAND ELASTICITY, AND INNOVATION*

International Economic Review - Tập 51 Số 2 - Trang 319-333 - 2010
Klaus Desmet1,2, Stephen L. Parente1,2
1Universidad Carlos III and CEPR, Spain
2University of Illinois at Urbana-Champaign U.S.A.

Tóm tắt

This article 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 markups. 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.

Từ khóa


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Thông tin
Thông tin xuất bản

International Economic Review

Tập 51 Số 2

319-333

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