Selection effects with heterogeneous firms

Working paper

We provide a general characterization of which firms will select alternative ways of serving a market. If and only if firms' maximum profits are supermodular in production and market-access costs, more efficient firms will select into the activity with lower market-access costs. Our result applies in a range of models and under a variety of assumptions about market structure. We show that supermodularity holds in many cases but not in all. Exceptions include FDI (both horizontal and vertical) when demands are "sub-convex" (i.e., less convex than CES), fixed costs that vary with access mode, and R&D with threshold effects.

Authors: Neary, P; Mrazova, M

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2011-12-01
• Paper number: 588
• Keywords: super- and sub-convexity; proximity-concentration trade-off; foreign direct investment (FDI); heterogeneous firms; supermodularity; R&D with threshold effects