Innovation, Price Dispersion, and Emergent Increasing Returns to Scale
David M. Levy
George Mason University - Center for Study of Public Choice
Michael D. Makowsky
Clemson University - John E. Walker Department of Economics
August 9, 2007
We present a model in which price dispersion allows long run increasing returns to scale to emerge from a competitive short run. The model hinges upon turnover in the productive technology-leading firm, price dispersion resultant of Stigler's logic of rational search and limited excludability of knowledge. Bankruptcy occurs in a form similar to the gambler's ruin, delayed by cash buffer stocks. The model requires no entry or replacement of failed firms. The number of active firms in a market reaches a stationarity increasing with, and contingent on, search costs.
Number of Pages in PDF File: 24
Keywords: innovation, increasing returns to scale, price dispersion, search
JEL Classification: C63, L11, O33, D83
Date posted: August 13, 2007
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