Desmet, KlausParente, Stephen L.2009-07-152011-02-012011-02-012010-05International Economic Review, 2010, v. 51, n.2, pp. 319-3331468-2354 (online)0020-6598https://hdl.handle.net/10016/4803This 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 literaturesapplication/pdftext/plainapplication/octet-streamapplication/octet-streamapplication/octet-streameng© the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Associationresearch articleEconomía10.1111/j.1468-2354.2010.00581.xopen access3192333International Economic Review51