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I study the joint determination of market structure and growth in an oligopolistic
economy. Firms run in-house R&D programs to produce over time a continuous flow of
cost-reducing innovations. In symmetric equilibrium, the relation between market structure
and growth has two aspects. First, a larger number of firms induces fragmentation
of the market and dispersion of R&D resources. This prevents exploitation of scale
economies internal to the firm and slows down growth. Second, the number of firms
changes with market and technology conditions and is endogenous. In particular, R&D
spending is a fixed cost and there is a negative feed-back of the rate of growth on
the number of firms. The explicit consideration of the interdependence of market structure
and growth identifies a fundamental trade-off between growth and variety that produces
interesting results. For example, the scale effect is bounded from above and converges
to zero when the number of firms is large. Moreover, the market grows too little and
supplies too much variety. The inefficiency is not due to technological externalities
but to oligopolistic pricing and the interaction between R&D and entry decisions.
[ABSTRACT FROM AUTHOR]
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