Affiliation:
1. Centre for Economic Performance, London School of Economics, Houghton Street, London WC2A 2AE.
Abstract
Firms face competing needs to expand product variety and reduce production costs. Access to larger markets enables innovation to reduce costs. Although firm scale increases, foreign competition reduces markups. Firms' ability to recapture lost markups depends on the interplay between within-firm competition and across-firm competition. Narrowing product variety eases within-firm competition but lowers market share. I provide a theory detailing the impact of trade policy on product and process innovation. Unbundling innovation provides new insights into welfare gains and innovation policy. Product innovation increases welfare beyond standard gains from trade. The relative returns to innovation policy change with trade liberalization. (JEL D24, F13, O31)
Publisher
American Economic Association
Subject
Economics and Econometrics
Cited by
124 articles.
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