A Hotelling long-run equilibrium model based on the microeconomics of optimization is developed to analyze the impact of market scale on specialization and standardization. Among our conclusions is that the degree of vertical division of labour and the number of varieties produced in a production line increase, via a rise in the extent of market with population, average income and market transaction efficiency; however, the opposite effects also result from a rise in average income via the preference for individualized products. The net effect of average income varies in different cases. Using these conclusions we explain some phenomena in the garment and auto industries.
- division of labour
- the Hotelling model