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

39 Pages Posted: 24 Oct 2006

See all articles by Klaus Desmet

Klaus Desmet

Southern Methodist University (SMU); Centre for Economic Policy Research (CEPR)

Stephen L. Parente

University of Illinois at Urbana-Champaign - Department of Economics

Date Written: September 2006

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.

Keywords: Market size, technology adoption, imperfect competition, Lancaster preferences

JEL Classification: F12, O13

Suggested Citation

Desmet, Klaus and Parente, Stephen L., Bigger is Better: Market Size, Demand Elasticity and Resistance to Technology Adoption (September 2006). CEPR Discussion Paper No. 5825. Available at SSRN: https://ssrn.com/abstract=939806

Klaus Desmet (Contact Author)

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stephen L. Parente

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

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