GROWTH, MARKET STRUCTURE, AND THE WELFARE EFFECTS OF ECONOMIC 
INTEGRATION 
 
 
 
 
Pietro F. Peretto* 
 
 
Department of Economics 
Duke University 
 
 
Revised: March 1996 
 
 
 
 
ABSTRACT 
 
This paper discusses the role of economic integration in a model of endogenous growth where the size of 
the firm and the interactions between growth and the (endogenous) structure of the market play a crucial 
role.  I focus on the pure scale effects of integration and study explicitly their welfare implications.  In a 
model where the additional trade-offs generated by the interaction between the endogenous structure of 
the market and the economy's rate of growth play a key role, it is no longer obvious that welfare should 
increase as a result of economic integration.  Both the growth and the welfare affects of integration are, in 
general, ambiguous.  The model, however, gives an intuitive characterization of the conditions necessary 
for integration to improve growth and welfare.  These results support the general insight suggested by 
Rivera-Batiz and Romer that if integration lets countries exploit increasing returns in R&D (the engine of 
growth), then it increases the long-run rate of growth purely because it enlarges the extent of the market.  
The economic mechanism driving this model, however, is quite different from the one driving the 
standard models of endogenous growth that they consider.  This paper, thus, offers a different perspective 
on the mechanics through which integration lets similar countries exploit increasing returns in R&D and 
provides new insights and qualifications on the connection between its effects on growth and welfare.   
 
 
 
 
Keywords: Market Structure, Growth, Sunk Costs, R&D, Economic Integration. 
JEL Classification Numbers: E10, L16, O31, O40 
 
 
* Address: Department of Economics, Duke University, Durham, NC 27708. Phone: (919) 6601807. Fax: 
(919) 6848974. E-mail: Peretto@lewis.econ.duke.edu.  Many thanks to Art Benavie, Kent Kimbrough, 
Mike Salemi, Steve Meardon, and workshop participants at UNC at Chapel Hill and Duke for their 
insightful comments.  I am solely responsible for all remaining errors.