Niche Firms, Mass Markets, and Income Across Countries: Accounting for the Impact of Entry Costs

Pedro Bento

No 13-11, Working Papers from Department of Economics, West Virginia University

Abstract: I develop a model of monopolistic competition in which I distinguish between niche markets and mass markets, in the spirit of Holmes and Stevens (2013). Firms choose between entering a small niche market with high markups or a large mass market with low markups. Entry costs have a much greater impact on output in the niche market as the gains to specialization are high, relative to the mass market where varieties are highly substitutable. Calibrated to match data from U.S. manufacturing, the model generates an elasticity of total factor productivity with respect to entry costs more than twice that in a model that abstracts from heterogeneous markets. I use data on entry costs across countries to show entry costs alone can account for half of the cross-country variation in productivity and income per worker, consistent with recent empirical estimates.

Keywords: aggregate productivity; niche; mass market; entry costs; regulation (search for similar items in EconPapers)
JEL-codes: O1 O4 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-10
New Economics Papers: this item is included in nep-bec and nep-reg
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Journal Article: Niche firms, mass markets, and income across countries: Accounting for the impact of entry costs (2014)
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