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Prof. Peter Neary

University of Oxford, United Kingdom

Authors: Monika Mrázová and J. Peter Neary

Abstract: We prove a general result on 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, the most efficient firms will engage in the activity with lower market-access costs whereas the least efficient will not. 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 iceberg transport costs with non-CES preferences, fixed costs that vary with access mode, and R&D with threshold effects.

Full Text: “Selection Effects with Heterogeneous Firms”