Innovation, Price Dispersion, and Emergent Increasing Returns to Scale

Abstract

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.

Keywords: innovation, increasing returns to scale, price dispersion, search

JEL Classification: C63, L11, O33, D83