Cost reduction, entry, and the interdependence of market structure and economic growth

I study the joint determination of market structure and growth in an oligop olistic economy. Firms run in-house R&D programs to produce over time a con tinuous flow of cost-reducing innovations. In symmetric equilibrium, the re lation between market structure and growth has two aspects, First, a larger number of firms induces fragmentation of the market and dispersion of R&D resources. This prevents exploitation of scale economies internal to the fi rm and slows down growth. Second, the number of firms changes with market a nd technology conditions and is endogenous. In particular, R&D spending is a fixed cost and there is a negative feed-back of the rate of growth on the number of firms. The explicit consideration of the interdependence of mark et structure and growth identifies a fundamental trade-off between growth a nd variety that produces interesting results. For example, the scale effect is bounded from above and converges to zero when the number of firms is la rge. Moreover, the market grows too little and supplies too much variety. T he inefficiency is not due to technological externalities but to oligopolis tic pricing and the interaction between R&D and entry decisions. (C) 1999 E lsevier Science B.V. All rights reserved. JEL classification: E10; L16; O31 ; O40.