Innovation, Price Dispersion, and Emergent Increasing Returns to Scale
24 Pages Posted: 13 Aug 2007
Date Written: August 9, 2007
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
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