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Product variety, competition and economic growth

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Abstract

In this paper, we study the relationship between competition and economic growth using a model of economic development through the creation of new sectors. In our model, competition has both an intra- and an inter-sector component. We find that the best conditions for economic development are achieved when a suitable ratio of inter- to intra-sector competition is achieved. This ratio constitutes a compromise between providing a temporary monopoly to the first entrepreneur (low inter-sector competition) and creating enough imitation to expand the sector (intra-sector competition).

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Authors and Affiliations

  1. UMR GAEL, Université Pierre Mendès-France, P.O. Box 47, 38040, Grenoble Cedex 9, France

    Pier Paolo Saviotti

  2. CNRS GREDEG, Sophia Antipolis, France

    Pier Paolo Saviotti

  3. Economics Department, University of Bremen, Hochschulring 4, 28359, Bremen, Germany

    Andreas Pyka

Authors
  1. Pier Paolo Saviotti
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  2. Andreas Pyka
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Correspondence to Pier Paolo Saviotti.

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Andreas Pyka currently also is Visiting Professor at the TU Delft, The Netherlands.

Appendix

Appendix

Simulation models usually include a set of parameters, which have to be specified numerically for different experiments. The behavior of a system can be crucially influenced by specific parameter settings and, therefore, sensitivity analyses become necessary in order to test the robustness of the model (Pyka and Fagiolo 2007). As our model does not include any stochastic variables, all results are completely deterministic, which makes Monte Carlo-simulations unnecessary. However, the results may be valid only in certain ranges of parameters and their combinations. In Saviotti and Pyka (2004c) we gave a detailed sensitivity analysis of different parameter combinations and tested the results for qualitative changes. Those tests showed that the corridors in the parameter space of our model where economic development is possible are relatively broad. The choice of the parameter values is based on expert validations (Klügl 2008) derived from the literature on structural change and economic growth. To test the robustness of our results, we performed simulation experiments combining extreme parameter combinations for k sef , R II and k IC, respectively, and investigated their impact on the development of the number of firms in the different industries (Figs. 10, 11, and 12).

Fig. 10
figure 10

Sensitivity for parameter combinations of R II and k ic

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Fig. 11
figure 11

Sensitivity for parameter combinations of k sef and k ic

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Fig. 12
figure 12

Sensitivity for parameter combinations of R II and k sef

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In Fig. 10, the number of firms per industry is growing considerably for higher values of k ic without, however, changing the qualitative structure of economic development with respect to the sectoral composition. With a growing importance of inter-industry competition relative to intra-industry competition, as measured by high values for RII, the number of firms falls and the speed of development is slightly reduced. Nevertheless, the cyclical emergence of industries shows up in the overall range of tested parameter values. The speed of sectoral development is positively affected by higher values of k sef in Fig. 11, both for low and high values of k ic , which, as in the sensitivity analysis above, exerts a strong positive effect on the overall number of firms in an industry. In this vein also, the third sensitivity test, displayed in Fig. 12, shows that the qualitative results remain unaffected by simultaneous variations of k sef and R II. Again, the rate of creation of new sectors rises for higher values of k sef , both for high as well as for low values of RII. The higher importance of inter-industry competition relative to intra-industry competition, following higher parameter values for R II, leads to the effect already observed in Fig. 10: a decreasing number of firms in each industry over time. The three sensitivity tests together show that our model remains robust over a large range of parameter values and combinations, and that the results can be considered as solid stylized facts of our model.

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Saviotti, P.P., Pyka, A. Product variety, competition and economic growth. J Evol Econ 18, 323–347 (2008). https://doi.org/10.1007/s00191-008-0097-5

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