Working Paper: CEPR ID: DP5825
Authors: Klaus Desmet; Stephen L. Parente
Abstract: This paper's hypothesis is that larger markets facilitate the adoption of more productive technology by raising the price elasticity of demand for a firm's product. A larger market, either because of population or free trade, thus implies a larger increase in revenues following the price reduction associated with the introduction of a more productive technology. As a result, technology adoption is more profitable, and the earnings of factor suppliers are less likely to be adversely affected. Firms operating in larger markets, therefore, have a greater incentive to adopt more productive technologies, and their factor suppliers have a smaller incentive to resist these adoptions. This is the case even when there is no fixed resource cost to adoption. We demonstrate this mechanism numerically and provide empirical support for this theory.
Keywords: Imperfect competition; Lancaster preferences; Market size; Technology adoption
JEL Codes: F12; O13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger markets (D40) | Increased price elasticity of demand (D49) |
| Increased price elasticity of demand (D49) | Incentivizes firms to adopt more productive technologies (O31) |
| Larger markets (D40) | Incentivizes firms to adopt more productive technologies (O31) |
| Increased price elasticity of demand (D49) | Larger increase in revenues following price reduction (D49) |
| Larger markets (D40) | Earnings of factor suppliers less adversely affected (D33) |
| Larger markets (D40) | Reduced resistance to technology adoption (O39) |