Bigger is better: Market size, demand elasticity, and innovation

Klaus Desmet, Stephen L. Parente

Research output: Contribution to journalArticle

Abstract

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.

Original languageEnglish (US)
Pages (from-to)319-333
Number of pages15
JournalInternational Economic Review
Volume51
Issue number2
DOIs
StatePublished - May 2010

ASJC Scopus subject areas

  • Economics and Econometrics

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