Critical Mass Effect and Restructuring in the Transition Towards a Market Economy

European Economic Review, Vol. 44, No. 3, February 2000

Posted: 7 Mar 2000

See all articles by Pier Luigi Sacco

Pier Luigi Sacco

affiliation not provided to SSRN

Carlo Scarpa

University of Brescia; NERA Economic Consulting

Multiple version iconThere are 2 versions of this paper

Abstract

In this paper we argue that restructuring firms in a transition economy produces an effect similar to a network externality, in that the profitability of restructuring depends on the number of firms that have already decided to adopt this strategy. While other papers assume the existence of a "critical mass effect", we want to investigate under what conditions such a critical mass exists. We define a "critical mass" as a situation in which such externality is positive and - as long as a sufficiently large number of firms have restructured - restructuring spurs imitation, possibly leading to the eventual transformation of the whole economy. We find that a critical mass effect exists when the main effect of restructuring is an increase in total value added (i.e., aggregate demand) rather than an increase in the firm's ability to compete against rival home firms. The critical mass case becomes the typical one when competition improves firms' efficiency.

Note: This is a description of the article and not the actual abstract.

JEL Classification: L11, L52, P21

Suggested Citation

Sacco, Pier Luigi and Scarpa, Carlo, Critical Mass Effect and Restructuring in the Transition Towards a Market Economy. European Economic Review, Vol. 44, No. 3, February 2000. Available at SSRN: https://ssrn.com/abstract=215780

Pier Luigi Sacco

affiliation not provided to SSRN

No Address Available

Carlo Scarpa (Contact Author)

University of Brescia ( email )

Via San Faustino 74B
Dipartimento di Scienze Economiche
25122 Brescia
Italy
+39+030+2988+833 (Phone)
+39+030+2988+839/840 (Fax)

NERA Economic Consulting ( email )

50 Main Street, 14th Floor
White Plains, NY 10606
United States

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