Market Integration, Demand, and the Growth of Firms: Evidence from a Natural Experiment in India
Robert Jensen, Nolan H. Miller
American Economic Review · 2018 · Volume 108 · Issue 12
Abstract
In many developing countries, the average firm is small, does not grow and has low productivity. Lack of market integration and limited information on non-local products often leave consumers unaware of the prices and quality of non-local firms. They therefore mostly buy locally, limiting firms' potential market size (and competition). We explore this hypothesis using a natural experiment in the Kerala boat-building industry. As consumers learn more about non-local builders, high quality builders gain market share and grow, while low quality firms exit. Aggregate quality increases, as does labor specialization, and average production costs decrease. Finally, quality-adjusted consumer prices decline.
Keywords
Firm Behavior: Empirical Analysis, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Information and Product Quality, Standardization and Compatibility, Firm Performance: Size, Diversification, and Scope, Automobiles, Other Transportation Equipment, Related Parts and Equipment, Microeconomic Analyses of Economic Development, Industrialization, Manufacturing and Service Industries, Choice of Technology
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