What determines aggregate returns to scale?

✍ Scribed by Jinill Kim

• Publisher: Elsevier Science
• Year: 2004
• Tongue: English
• Weight: 288 KB
• Volume: 28
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(03)00096-4

✦ Synopsis

This paper develops a uniÿed framework that incorporates four features important in existing models with increasing returns: ÿxed costs, decreasing marginal costs, product variety, and market power. When ÿxed costs are not allowed to vary and proÿts are imposed to be zero in every period, only the degree of returns to variety determines the degree of aggregate increasing returns to scale. When ÿxed costs respond to changes in aggregate activity or the zero-proÿt condition does not hold in the short run, aggregate returns depend not only on product variety but also on diminishing marginal costs or market power. The degree of market power, however, does not a ect input prices, which are critical to determine the uniqueness of equilibrium.