Destabilizing effects of market size in the dynamics of innovation. (English) Zbl 1484.91203
Summary: In existing models of endogenous innovation cycles, market size alters the amplitude of fluctuations without changing the nature of fluctuations. This is due to the ubiquitous assumption of CES homothetic demand system, implying that monopolistically competitive firms sell their products at an exogenous markup rate in spite of the empirical evidence for the procompetitive effect of entry and market size. We extend the Judd model of endogenous innovation cycles to allow for the procompetitive effect, using a more general homothetic demand system. We show that a larger market size/innovation cost ratio, by reducing the markup rate through the procompetitive effect, has destabilizing effects on the dynamics of innovation under two complementary sets of sufficient conditions; i) when the price elasticity is “not too convex” in price; and ii) when the demand system belongs to the two parametric families, “generalized translog” and “constant pass-through”, each of which features the choke price and yet contains CES as a limit case. Interestingly, the destabilizing effects become amplified as the demand system approaches to the CES limit within each family. We also discuss some cross-sectional implications in a multi-market extension. Because innovation/entry activities fluctuate more in larger markets, they are not always higher in larger markets than smaller markets. Furthermore, the sale of each product is more volatile in larger markets.
MSC:
| 91B24 | Microeconomic theory (price theory and economic markets) |
| 91B38 | Production theory, theory of the firm |
Keywords:
endogenous innovation cycles; Judd model; H.S.A.; procompetitive effect; market size and volatility; piecewise-linear dynamical systemReferences:
| [1] | Acemoglu, Daron, Introduction to Modern Economic Growth (2008), Princeton University Press · Zbl 1158.91001 |
| [2] | Aghion, Philippe; Howitt, Peter, A model of growth through creative destruction, Econometrica, 60, 323-351 (1992) · Zbl 0825.90147 |
| [3] | Aghion, Philippe; Howitt, Peter, The Economics of Growth (2008), MIT Press · Zbl 1038.91540 |
| [4] | Avrutin, V.; Gardini, L.; Sushko, I.; Tramontana, F., Continuous and Discontinuous Piecewise-Smooth One-Dimensional Maps (2019), World Scientific · Zbl 1452.37002 |
| [5] | Baqaee, D.; Fahri, E., Darwinian Returns to Scale (2020), Harvard and UCLA |
| [6] | Behrens, K.; Murata, Y., General equilibrium models of monopolistic competition: a new approach, J. Econ. Theory, 136, 776-787 (2007) · Zbl 1281.91116 |
| [7] | Benhabib, Jess, Multiple equilibria in the Aghion-Howitt model, Res. Econ., 68, 112-116 (2014) |
| [8] | Campbell, Jeffrey R.; Hopenhayn, Hugo A., Market size matters, J. Ind. Econ., 53, 1-25 (March 2005) |
| [9] | Deneckere, Raymond; Judd, Kenneth, Cyclical and chaotic behavior in a dynamic equilibrium model, (Benhabib, Jess, Cycles and Chaos in Economic Equilibrium (1992), Princeton University Press: Princeton University Press Princeton), Chapter 14 |
| [10] | Dhingra, S.; Morrow, J., Monopolistic competition and optimum product diversity under firm heterogeneity, J. Polit. Econ., 127, 1, 196-232 (2019) |
| [11] | Dixit, Avinash K.; Stiglitz, Joseph E., Monopolistic competition and optimal product diversity, Am. Econ. Rev., 67, 3, 297-308 (June 1977) |
| [12] | Evans, George; Honkaponja, Seppo; Romer, Paul M., Growth cycles, Am. Econ. Rev., 88, 495-515 (June 1998) |
| [13] | Feenstra, Robert C., A homothetic utility function for monopolistic competition models, without constant price elasticity, Econ. Lett., 78, 79-86 (2003) · Zbl 1035.91042 |
| [14] | Feenstra, Robert C.; Weinstein, David E., Globalization, markups, and US welfare, J. Polit. Econ., 125, 4, 1040-1074 (2017) |
| [15] | Francois, Patrick; Lloyd-Ellis, Huw, Animal spirits through creative destruction, Am. Econ. Rev., 93, 530-550 (2003) |
| [16] | Gale, Douglas, Delay and cycles, Rev. Econ. Stud., 63, 169-198 (1996) · Zbl 0856.90021 |
| [17] | Gancia, Gino; Zilibotti, Fabrizio, Horizontal innovation in the theory of growth and development, (Aghion, Philippe; Durlauf, Steven, Handbook of Economic Growth, Vol. 1 (2005), Elsevier), 111-170, Chapter 3 |
| [18] | Gancia, Gino; Zilibotti, Fabrizio, Technological change and the wealth of nations, Annu. Rev. Econ., 1, 93-120 (2009) |
| [19] | Gardini, Laura; Sushko, Iryna; Naimzada, Ahmad, Growing through chaotic intervals, J. Econ. Theory, 143, 541-557 (2008) · Zbl 1151.91633 |
| [20] | Gaubert, Cecile, Essays on Firms and Cities (2014), Princeton University, PhD dissertation |
| [21] | Grossman, G. M.; Helpman, E., Innovation and Growth in the Global Economy (1993), MIT Press |
| [22] | Grossman, G. M.; Helpman, E.; Luillier, H., Supply Chain Resilience: Should Policy Promote Diversification or Reshoring (2021), Princeton and Harvard University |
| [23] | Iong, Ka-Kit; Irmen, Andreas, The supply of hours worked and fluctuations between growth regimes, J. Econ. Theory, 194, Article 105239 pp. (2021) · Zbl 1461.91189 |
| [24] | Jovanovic, Boyan, Asymmetric cycles, Rev. Econ. Stud., 73, 145-162 (2006) · Zbl 1137.91544 |
| [25] | Jovanovic, Boyan; Rob, Rafael, Long waves and short waves: growth through intensive and extensive search, Econometrica, 58, 1391-1409 (1990) · Zbl 0729.90554 |
| [26] | Judd, Kenneth L., On the performance of patents, Econometrica, 53, 567-586 (May 1985) · Zbl 0563.90020 |
| [27] | Kasahara, H.; Sugita, Y., Nonparametric Identification of Production Function, Total Factor Productivity, and Markup from Revenue Data (2020), UBC and Hitotsubashi University |
| [28] | Lasota, A.; Yorke, J., On the existence of invariant measures for piece-wise monotone transformations, Trans. Am. Math. Soc., 186 (1973), 481-488 · Zbl 0298.28015 |
| [29] | Latzer, H.; Matsuyama, K.; Parenti, M., Reconsidering the Market Size Effect in Innovation and Growth (2019), CEPR DP #14250 |
| [30] | Li, T.-Y.; Yorke, J., Period three implies chaos, Am. Math. Mon., 82, 985-992 (1975) · Zbl 0351.92021 |
| [31] | Matsuyama, K., Growing through cycles, Econometrica, 67, 335-347 (March 1999) · Zbl 1049.91514 |
| [32] | Matsuyama, K., Growing through cycles in an infinitely lived agent economy, J. Econ. Theory, 100, 220-234 (October 2001) · Zbl 0992.91072 |
| [33] | Matsuyama, K.; Sushko, I.; Gardini, L., Revisiting the model of credit cycles with good and bad projects, J. Econ. Theory, 163, 525-556 (2016) · Zbl 1369.91129 |
| [34] | Matsuyama, K.; Ushchev, P., Beyond CES: Three Alternative Classes of Flexible Homothetic Demand Systems (2017), CEPR DP #12210 |
| [35] | Matsuyama, K.; Ushchev, P., When Does Procompetitive Entry Imply Excessive Entry? (2020), CEPR DP #14991 |
| [36] | Matsuyama, K.; Ushchev, P., Constant Pass-Through (2020), CEPR DP #15475 |
| [37] | Matsuyama, K.; Ushchev, P., Selection and Sorting of Heterogeneous Firms through the Procompetitive Effect (2022), Northwestern University and HSE: Northwestern University and HSE Saint Petersburg |
| [38] | Parenti, M.; Ushchev, P.; Thisse, J-F., Toward a theory of monopolistic competition, J. Econ. Theory, 167, 86-115 (2017) · Zbl 1400.91302 |
| [39] | Rivera-Batiz, L. A.; Romer, P. M., Economic integration and economic growth, Q. J. Econ., 106, 531-555 (1991) |
| [40] | Romer, Paul M., Endogenous technological change, J. Polit. Econ., 98, 5, 71-102 (October 1990) |
| [41] | Shleifer, Andrei, Implementation cycles, J. Polit. Econ., 94, 1163-1190 (December 1986) |
| [42] | Stein, Jeremy C., Waves of creative destruction: firm-specific learning-by-doing and the dynamics of innovation, Rev. Econ. Stud., 64, 2, 265-288 (1997) · Zbl 0890.90021 |
| [43] | Sushko, Iryna; Gardini, Laura, Degenerate bifurcations and border collisions in piecewise smooth 1D and 2D maps, Int. J. Bifurc. Chaos, 20, 2046-2070 (2010) · Zbl 1196.37090 |
| [44] | Thisse, J-F.; Ushchev, P., Monopolistic competition without apology, (Corchon, L.; Marini, M., Handbook of Industrial Organization, vol. I (2018), Edgar Publication), Ch. 5 |
| [45] | Vives, X., Innovation and competitive pressure, J. Ind. Econ., 56, 419-469 (2008) |
| [46] | Wälde, Klaus, Endogenous growth cycles, Int. Econ. Rev., 46, 867-894 (2005) |
| [47] | Zhelobodko, Evgeny; Kokovin, Sergey; Parenti, Mathieu; Thisse, Jacques-Francois, Monopolistic competition: beyond the constant elasticity of substitution, Econometrica, 80, 6, 2765-2784 (November 2012) · Zbl 1274.91301 |
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. In some cases that data have been complemented/enhanced by data from zbMATH Open. This attempts to reflect the references listed in the original paper as accurately as possible without claiming completeness or a perfect matching.
