Specialization vs. Competition: An Anatomy of Increasing Returns to Scale

31 Pages Posted: 22 Apr 2016

See all articles by Alberto Bucci

Alberto Bucci

University of Milan - Department of Business Policy and Economics

Philip Ushchev

HSE University

Date Written: April 21, 2016

Abstract

We develop a two-sector model of monopolistic competition with a differentiated intermediate good and variable elasticity of technological substitution. This setting proves to be well-suited to studying the nature and origins of external increasing returns. We disentangle two sources of scale economies: specialization and competition. The former depends only on how TFP varies with input diversity, while the latter is fully captured by the behavior of the elasticity of substitution across inputs. This distinction gives rise to a full characterization of the rich array of competition regimes in our model. The necessary and sufficient conditions for each regime to occur are expressed in terms of the relationships between TFP and the elasticity of substitution as functions of the input diversity. Moreover, we demonstrate that, despite the folk wisdom resting on CES models, specialization economies are in general neither necessary nor sufficient for external increasing returns to emerge. This highlights the profound and non-trivial role of market competition in generating agglomeration economies, endogenous growth, and other phenomena driven by scale economies.

Keywords: External Increasing Returns; Variable Elasticity of Substitution; Specialization Effect; Competition Effect

JEL Classification: D24, D43, F12, L13

Suggested Citation

Bucci, Alberto and Ushchev, Philip, Specialization vs. Competition: An Anatomy of Increasing Returns to Scale (April 21, 2016). Higher School of Economics Research Paper No. WP BRP 134/EC/2016, Available at SSRN: https://ssrn.com/abstract=2768095 or http://dx.doi.org/10.2139/ssrn.2768095

Alberto Bucci

University of Milan - Department of Business Policy and Economics ( email )

Via Mercalli, 23
20122-Milano
Italy
+39(0)2 50321.463 (Phone)
+39(0)2 50321.505 (Fax)

Philip Ushchev (Contact Author)

HSE University ( email )

3a Kantemirovskaya St, room 405
123 Griboedov Canal Embankment, room 123
Saint-Petersburg, Saint Petersburg 191119
Russia

HOME PAGE: http://https://sites.google.com/site/philipushchev/

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