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Bigger is better : market size, demand elasticity and innovation

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URI: https://hdl.handle.net/10016/4803
ISSN: 1468-2354 (online)
ISSN: 0020-6598
DOI: 10.1111/j.1468-2354.2010.00581.x
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bigger_IER_2010_ps.pdf (349.02 KB)
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2010-05
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Wiley-Blackwell
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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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International Economic Review, 2010, v. 51, n.2, pp. 319-333
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