Publication: Bigger is better : market size, demand elasticity and innovation
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ISSN: 1468-2354 (online)
ISSN: 0020-6598
Publication date
2010-05
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Wiley-Blackwell
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
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Bibliographic citation
International Economic Review, 2010, v. 51, n.2, pp. 319-333