Can a larger market foster R&D under monopolistic competition with variable mark-ups?

Monopolistic Competition and Quality Innovation with Variable Demand Elasticity

“…Namely, markups increase (decrease) with market size if the elasticities of the production cost and the innovation cost decrease (increase) with output level and quality provision, respectively. I then generalize these results to case where the marginal cost of production increases with product quality provision and compare them with the ones obtained in related works by Bykadorov and Kokovin (2017) that study process innovation in the same framework employed here, and by Vives (2008) that studies process innovation in oligopolistic market. I …nd that the market size e¤ect on equilibrium markups depends on innovation type, that is even with the same production cost and innovation cost elasticities, market size may have di¤erent e¤ect on equilibrium markups under product quality innovation and process innovation.…”

“…For equal consumption levels from all products, equation (3) also de…nes the elasticity of substitution across varieties. 7 The monopolistic competition under 4 is the Lagrange multiplier from the consumer's optimization. 5 I will use Epsilon, ", to denote all di¤erent elasticities considered below.…”

“…Here, again, the e¤ect of market size on the …rm's output and R&D 15 As the sum of the elasticies of two functions is di¤erent from the elasticity of the the sum of those functions. 16 As in the case of no …x production cost and constant marginal cost which is assumed by Bykadorov and Kokovin (2017). 17 See the …rst equation from the top of page 438, there.…”

Monopolistic Competition Model With Entrance Fee

“…We study two types of retailer behavior: with and without the condition of free entry (cf. [1][2][3]). The result is that when the retailer imposes an entrance fee for each producer, it leads to an increase in both social welfare and consumer surplus.…”