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Specialization versus competition: an anatomy of increasing returns to scale

Author

Listed:
  • Alberto Bucci
  • Philip Ushchev
Abstract
We develop a model of monopolistic competition with a differentiated intermediate good and variable elasticity of technological substitution. The model allows to study the nature and origins of external increasing returns. We single out two sources of scale economies: specialization and competition. The former depends only on how total factor productivity (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 sufficient 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 constant elasticity of substitution models, specialization economies are in general neither necessary nor sufficient for external increasing returns to emerge. This highlights the profound and nontrivial role of market competition in generating agglomeration economies and other phenomena driven by scale economies.

Suggested Citation

  • Alberto Bucci & Philip Ushchev, 2021. "Specialization versus competition: an anatomy of increasing returns to scale," Journal of Economic Geography, Oxford University Press, vol. 21(3), pages 461-486.
    • Handle: RePEc:oup:jecgeo:v:21:y:2021:i:3:p:461-486.
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    File URL: http://hdl.handle.net/10.1093/jeg/lbaa014
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    Cited by:

    1. Xuemeng Guo & Ke Guo & Hanzhong Zheng, 2023. "Industrial Agglomeration and Enterprise Innovation Sustainability: Empirical Evidence from the Chinese A-Share Market," Sustainability, MDPI, vol. 15(15), pages 1-26, July.
    2. Xuemeng Guo & Ke Guo & Lingpeng Kong, 2023. "Industrial Agglomeration and Corporate ESG Performance: Empirical Evidence from Manufacturing and Producer Services," Sustainability, MDPI, vol. 15(16), pages 1-23, August.

    More about this item

    Keywords

    External increasing returns; variable elasticity of substitution; specialization effect; competition effect;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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