Citation

Discussion Paper Details

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Title: Bigger is Better: Market Size, Demand Elasticity and Resistance to Technology Adoption

Author(s): Klaus Desmet and Stephen Parente

Publication Date: September 2006

Keyword(s): imperfect competition, Lancaster preferences, market size and technology adoption

Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Desmet, K and Parente, S. 2006. 'Bigger is Better: Market Size, Demand Elasticity and Resistance to Technology Adoption'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5825