Market Size Effects Research Articles

R&D Cooperation in Regular Networks with Endogenous Absorptive Capacity

AbstractIn this paper we analyze how firms’ R&D investment decisions, firms’ profits and social welfare are affected by absorptive capacity; that is, the ability of a firm to learn from other collaborating firms. The model developed is a strategic regular network where firms have the opportunity to form pair-wise collaborative links with other firms and then compete à la Cournot. Different to the existing literature, we find that firms’ R&D efforts could increase or decrease with the degree of the network, depending on the level of absorptive capacity, the market size and the network dimension. In particular, in the case of small market size and low learning effect, the connection between firms drives up research investments. Moreover, if absorptive capacity is sufficiently low, the research collaboration between firms turns out not to be desirable from a private point of view while, in line with the existing literature, social efficiency requires a complete or intermediate level of collaborative activity. We also show that the complete network is pair-wise stable and socially optimal for an intermediate level of spillover intensity, while the empty network maximizes firms’ profits when absorptive capacity is small, yet it is not pair-wise stable.

Gains from Trade Liberalization between Heterogeneous Countries: Implications for Korea-Japan FTA

We study the welfare implications of a bilateral free trade agreement. The model is based on the recent trade literature that considers search and matching frictions in the labor market. We extend the model by incorporating country-level heterogeneity in terms of production technology, population, and productivity endowment. Model simulation results show a simultaneous tariff cut between symmetric countries to reduce unemployment rates and increase prices in the product market due to higher long run demand, while nevertheless benefiting the economy owing to a more rapid rise in consumer income. In the case of asymmetric countries, we find that larger gains from greater openness to trade accrue to a country with (relatively) more elastic supply occasioned by capital-intensive production technology that accommodates more flexible adjustments to output in response to increased demand. We calibrate the model to Korean and Japanese data in order to assess the expected outcome of the potential trade liberalization between those countries. With a scenario of symmetric level of trade liberalization (in terms of trade cost reduction), when we assume the same population size in a counterfactual way, we find Japan to receive greater benefits from the opening because its relatively more capital intensive production allow for quicker output adjustment upon trade liberalization. When we presume, however, that Japan's population is 2.5 times that of Korea, the results show Korea to enjoy a slightly more surplus due to the market size effect.

Foreign direct investment in a small open economy

Think of a small open economy interestingly positioned between the trade blocs of the NAFTA and the EU, with FDI in recent years resembling the pattern before the economic crash, making a pre-crash data set useful for exploring potential long-term trends. In this research, investment is explained by geographic location and country size, using a gravity model to account for the country's exceptional remoteness and sparseness. A unique extension of the gravity model applies the inverse hyperbolic sine (IHS) function. The IHS functional form is estimated together with fixed difference between investment sectors and trade blocs being estimated simultaneously, an analysis that is rarely possible. Results indicate that under these conditions, investment appears to be more driven by wealth than market size effects.

Effects of North–South trade on wage inequality and on human-capital accumulation

This paper develops an endogenous growth model with technological knowledge directed towards high- versus low-skilled labour, augmented with North–South international trade of intermediate goods and with human-capital accumulation, to analyse how trade affects wage inequality and the inter-country human-capital gap. Trade is a vehicle for inter-country technological-knowledge diffusion and human-capital accumulation interacts with the intra-country direction of technological knowledge arising from trade. In contrast with the market-size effect, stressed in the skill-biased technological change literature, the operation of the price channel following openness to trade predicts, in line with the recent trends in developed and developing countries, an increasing technological-knowledge bias towards high-skilled human capital. This, in turn, decreases inter-country gaps of technological knowledge and human capital and increases intra-country wage inequality. Also in line with recent empirical evidence, inter-country wage convergence is induced by the trade-opening level effect.

Unemployment and market size

Without strong empirical support, labour market matching models typically assume constant returns to scale in matching. We construct a tractable equilibrium random matching model with a general matching technology, introducing market size effects: the job‐finding rate varies with unemployment. Stable steady‐states may occur in regions of increasing or decreasing returns, and multiple equilibria are welfare‐ranked by market size. While the standard model relies on high‐frequency shocks to the steady state to explain the co‐movement of unemployment and job‐finding, locally decreasing returns in matching generate plausible adjustment dynamics and slower convergence. Lastly, an extension of the Hosios condition internalises search externalities.

Non-Homothetic Preferences and Industry Directed Technical Change

Sectoral data features (i) changing relative expenditures of different sectors, (ii) non-constancy in relative prices and (iii) long-run trends in relative TFP growth rates across sectors. We provide a tractable theory of industry directed technical change, which is able to reconcile these findings. In doing so, this paper emphasizes the importance of directed technical change, nonhomotheticity of preferences and structural change as a long-run phenomenon. Using the input-output tables of the U.S., our theory helps us to reconstruct how structural change in terms of final consumption affects the market size of industry value-added. Arguing that the structural change across broad categories of final consumption is exogenous from the perspective of an individual firm, this gives us an instrument for the industrial market size (at the valueadded level). We then empirically test for the market size effect of induced innovation. Our findings suggest that a 1 percent increase in an industry’s market size (relative to GDP) leads to an increase in the TFP growth rate of about 0.3 percentage points over five years.

Monopolistic Competition: A Dual Approach

We study monopolistic competition under indirect additivity of preferences. This is dual to the Dixit-Stiglitz model, where direct additivity is assumed, with the CES case as the only common ground. Other examples include (perceived) demand functions that are exponential or linear. Our equilibrium results are generally in contrast with those received by the literature. An increase of the number of consumers never affects prices and firms' size, but increases proportionally the number of firms, creating pure gains from variety. An increase in individual income increases prices (and more than proportionally the number of varieties) and reduces firms' size if and only if the price elasticity of demand is increasing. We also study the endogenous market structure with Bertrand competition (in which a pro-competitive effect of market size arises) and the case for inefficient entry.

La performance della filiera ortofrutticola di esportazione dei Paesi Terzi del Mediterraneo nel mercato europeo: tra concorrenza e cooperazione

The objective of this paper is to provide a focused analysis of the competitiveness of fruit and vegetable exports from two south Mediterranean countries (Egypt and Morocco).We first provide a brief overview of the export flows to the international market, which aims to analyze the dynamics of destination markets and the range of exported products. Then, competitiveness on the European (and Italian) market is analyzed. After an introductory analysis of the dynamics of the Egyptian and Moroccane market shares regarding eu (and Italian) F&V imports over the period 2000-2010 per product category, a Constant Market Share Analysis (cmsa) is developed. This method enables us to further analyze trade performance by splitting up the various imports from Egypt and Morocco into different components (market size, commodity composition, and competitiveness effect). Finally, we provide a discussion on the question of what extent imports from Egypt and Morocco and Italian production might substitute or complement each other and on a discussion on potential price and non-price competitiveness factors. This discussion is further developed with an analysis of third countries’ abilities to comply with the Italian market’s food safety requirements. The paper finishes with a discussion on the prospects for North-South cooperation.

SKILL BIAS IN AN ENDOGENOUS GROWTH MODEL: EVALUATING THE CASE FOR MARKET SIZE AND ACCELERATION EFFECTS

Skill-biased technical change occupied empirical economists for much of the 1990s. The empirical literature firmly established a positive correlation between technology indicators and demand shifts. In the minds of many, that has established a causal relationship. This leap of faith, however, is at odds with Hicks's conventional wisdom that endogenous technological change will be biased toward using cheap and abundant resources. In addition, if the rate of technical change is considered to be endogenous, the assumption of an exogenous bias toward skilled labor should at least be questioned. Two hypotheses explaining endogenous skill bias in technical change have been suggested in the theoretical literature: the acceleration effect and the market size effect. In this paper these are studied in a single endogenous-growth model to derive the sufficient and necessary conditions for both hypotheses. After confronting these conditions with the evidence, the paper concludes that it strongly favors the acceleration hypothesis.

Trade and industrial structure with large firms and heterogeneity

We develop a model of trade and firm heterogeneity in an oligopolistic setting. This setting generates key differences in terms of modelling setup, modelling predictions and welfare implications with respect to the existing literature on trade and firm heterogeneity. In terms of modelling setup our approach allows us to explore interaction between potentially large heterogeneous firms, in contrast to recent trade literature with heterogeneity and atomistic firms. As a result variables like market price and total sales vary endogenously as different firms enter the market. We offer a solution for the integer problem inherent in small group models, based on stochastic dominance. The model generates testable predictions deviating from the benchmark firm heterogeneity model of Melitz (2003) in terms of the effect of trade liberalisation on markups, market shares, the market price. We also derive predictions on the effect of distance and market size on the probability of zero trade flows and export prices. Our model features the possibility that welfare declines as a result of trade liberalisation. The result in Brander and Krugman (1983), the benchmark model for trade under oligopoly, that welfare unambiguously rises with free entry and might decline without free entry due to increased cross-hauling is reversed. In a setting with heterogeneous instead of homogeneous firms, welfare might decline with free entry. A negative welfare effect without free entry can be ruled out if the firm size distribution is sufficiently dispersed.

Reply to Comments

First, He suggests that the assumption of fully rational, autarkic agents can be misleading in view of growing experimental evidence on the role played by social norms and reciprocity in human behavior. In particular, it is likely that, as, e.g., in Cantono and Silverberg (2009), consumers' willingness to pay (WTP) for green products is affected by the WTPs of their neighbors. Including peer effects in consumption would certainly have relevant implications for our analysis giving an active role both to local (i.e. spatial) and aggregate income inequality. The spatial distribution of agents endowed with different income levels would affect the distribution of preferences for a given aggregate level of inequality. In spite of its relevance, this extension would deliver quite intuitive implications. Consider, for sake of simplicity, two populations charac- terized by the same level of aggregate inequality and different levels of segregation by incomes, which is here a sufficient statistics for broader socio-economic conditions. It is clear then that the first population would display a stronger pioneer consumer effect, while the second a larger mass of potential adopters, i.e. larger market size effect. From a purely theoretical perspective, all our results for technology diffusion apply to this more general case. Relevant implications would emerge, instead, by allowing the government to intervene in both the sorting process and in the determination of the income distribution. However, such analysis would lack realism: policies explicitly affecting sorting are not feasible in market economies where the house market determines the level of segregation. Finally, the empirical evidence in support of peer effects in consumption is still scant, see footnote 4 in the paper, so this assump-

Coping with the Standards Regime: Analyzing Export Competitiveness of Indian Seafood Industry

<p>In this research paper a Constant Market Share (CMS) approach was employed to learn export performance dynamics of Indian seafood (shrimps and cephalopods) in the major export destinations (EU, USA and select Asian countries), which accounts for a sizeable market for Indian seafood. The Constant Market Share model was used to disintegrate the growth in exports of seafood into market size effect, market composition effect and competitiveness effect. The analysis was performed for the seafood exports for a span of 12 years from the year 1996 to the year 2007, the period during which India had to face severe challenges from evolving food safety regulations in the EU and USA. The analysis was extended to account for the competitiveness at dis-aggregated commodity level. In the present study we observed enhanced competitiveness in the case of cephalopods while shrimp exports were less competitive. To a certain extent it shows that trade facilitating as well as trade restricting effects can coexist as an impact of strict food safety regulations.</p>

The Short Term Prediction of Analysts' Forecast Error

We examine the profitability of implementing a short term trading strategy based on predicting the error in analysts' earnings per share forecasts using publicly available information. In the 1998-2010 I/B/E/S data, the strategy of taking a long (short) position in stocks with the most pessimistic (optimistic) consensus forecast and closing the position on the rst post announcement day has an annual gross abnormal return of 16.56%, after correcting for market risk, size, book-to-market and price momentum effects. A key insight is that the profitability of the trading strategy stems from using robust forecasting methods and from focusing on the stocks with the most extreme predicted forecast errors. The trading strategies using least squares regression and/or focusing merely on the sign of the forecast error are not profitable.

Price Inference in Small Markets

This paper investigates the effects of market size on the ability of price to aggregate traders' private information. To account for heterogeneity in correlation of trader values, a Gaussian model of double auction is introduced that departs from the standard information structure based on a common (fundamental) shock. The paper shows that markets are informationally efficient only if correlations of values coincide across all bidder pairs. As a result, with heterogeneously interdependent values, price informativeness may not increase monotonically with market size. As a necessary and sufficient condition for the monotonicity, price informativeness increases with the number of traders if the implied reduction in (the absolute value of) an average correlation statistic of an information structure is sufficiently small.

Is Default Risk Priced in Equity Returns?

We disentangle the complexity of the distress risk premium in stock returns using the risk-neutral measure of credit risk (valued by CDS spread) and investigate the relation between credit risk and the market beta, size, value, and momentum effects. Consistent with the argument of the negative distress premium, firms with higher credit risk have lower stock returns, and a positive value effect is concentrated in high credit quality firms. However, credit risk is positively priced in returns on stocks that won most in the past year and that, during the crisis, comove most with the market. A positive momentum effect is concentrated in high credit risk firms. Furthermore, the size effect, but not the value effect, could be attributed to a positive credit risk effect.

Market Size, Cannibalization and Policy Competition for a Multiproduct Multinational Firm

This paper studies policy competition for a foreign-owned multiproduct monopolist firm producing two products that are horizontally differentiated between two countries of different size. We show that the equilibrium outcome of FDI competition is determined by the interaction between the market size effect and the cannibalization effect, and countries’ subsidy policies. Welfare effects of competition for FDI are derived; in particular, we show that the competing countries may Pareto strictly gain from or Pareto strictly lose from FDI competition.

Scale-independent North-South trade effects on the technological-knowledge bias and on wage inequality

This paper develops a general equilibrium endogenous growth model that highlights the scale-independent mechanisms through which trade-induced North-South technological-knowledge diffusion affects the technological-knowledge bias and, thus, the paths of intra-country wage inequality. In contrast with the market-size effect, stressed in the previous literature on skill-biased technological change, the operation of the emphasized price channel following openness predicts, in line with the recent trends in developed and developing countries, an increasing skilled technological-knowledge bias, which, in turn, rises wage inequality in favor of skilled labor.

Is Trade Liberalization Causing an Outflow of Foreign Investment?

The period 1973-2009 marked a nearly 16% annual outflow of foreign investment for the global economy as the policymakers persisted with trade liberalization to attract foreign capital for sustainable economic growth and development. The adverse impact of capital flight due to investment outflows on the long-run economic growth is well understood. A vast body of empirical literature has looked at the determinants of foreign investment flows primarily for the individual economies. In this paper I focus on country groups (formed by economic criteria, geographical region and commercial agreements), and using the Vector Error Correction Model (VECM) approach I examine the short-run and the long-run effects of openness, economic growth-rate and market size on FDI outflows for each of the 60 country groups covered in my study. I identify the robust determinants of FDI outflows and use the cointegrating VECMs to produce out-of-sample forecasts for FDI outflows.

Market Size, Competitiveness and Technological Frontier - The Impact of Trade Integration with the UE on Productivity in Polish Manufacturing Sectors

This paper addresses the relationship between growth of relative productivity in Polish manufacturing sectors and forces stemming from trade integration with the EU. We look at the productivity growth from the perspective of relations between Polish manufacturing sectors and the foreign ones, focusing on partner countries from the enlarged EU. Empirical analysis is based on sector level bilateral data concerning both domestic (Polish) and foreign market characteristics and degree of openness in the period 1995-2006. Main results indicate that, both in the short and long run, growth in domestic openness (independently on the direction of trade flows) exert positive effect on growth of relative productivity in Poland, while the opposite impact is exhibited by foreign openness. In addition, expansion in relative size of Polish sectors versus foreign ones is also among positive determinants of domestic labour productivity growth. The results suggest that domestic openness and market size effects have stimulated movement of Polish sectors towards the technological frontier with respect to the partner countries from the EU.

International interdependence and regulatory power: Authority, mobility, and markets

This article revisits a fundamental question of international political economy: when does cross-border economic interdependence become a source of power. The view that economic interdependence is a source of potential power, not just mutual benefits, has a long lineage traceable to political realism, organizational economics, Ricardian trade theory, and structural Marxism, and researchers typically focus on preferred causal variables in isolation. Despite important contributions, little attention has been paid to understanding the interactions of multiple perspectives on asymmetric interdependence, or to making sense of contradictory expectations of the various models. As a consequence scholars engaged in globalization debates, such as those about policy convergence or private actor governance, frequently talk past one another. To deduce expectations about the relationship between power and interdependence, we build a model synthesizing standard approaches that analyze the effects of market size and market scope separately, and then add the critical variable of jurisdictional boundaries. By decoupling geography and authority, our analysis produces a respecification of classic interdependence models and advances core international political economy debates concerning power dynamics in a globalized economy.