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Specialization vs Competition: An Anatomy of Increasing Returns to Scale

Alberto Bucci () and Philip Ushchev ()

No WP BRP 134/EC/2016, HSE Working papers from National Research University Higher School of Economics

Abstract: We develop a two-sector model of monopolistic competition with a dierentiated 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 sucient 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 sucient 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 Eect; Competition Eect (search for similar items in EconPapers)
JEL-codes: D24 D43 F12 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind and nep-pke
Date: 2016
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Published in WP BRP Series: Economics / EC, April 2016, pages 1-31

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