TY - JOUR
T1 - Bigger is better
T2 - Market size, demand elasticity, and innovation
AU - Desmet, Klaus
AU - Parente, Stephen L.
PY - 2010/5
Y1 - 2010/5
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=77954140249&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=77954140249&partnerID=8YFLogxK
U2 - 10.1111/j.1468-2354.2010.00581.x
DO - 10.1111/j.1468-2354.2010.00581.x
M3 - Article
AN - SCOPUS:77954140249
SN - 0020-6598
VL - 51
SP - 319
EP - 333
JO - International Economic Review
JF - International Economic Review
IS - 2
ER -