The Darwinian Returns to Scale.

The article investigates how an increase in market size, such as through globalization, affects welfare within a model featuring monopolistic competition, heterogeneous firm markups, and fixed costs. It decomposes welfare changes into technical efficiency and allocative efficiency, further breaking down allocative efficiency into three effects: the Darwinian effect (reallocation toward high-markup firms due to intensified competition), the selection effect (exit of marginally profitable firms), and the pro/anticompetitive effect (changes in firms' markups). Using nonparametric calibration with Belgian manufacturing data, the study finds that allocative efficiency gains—primarily driven by the Darwinian effect—account for 70–90% of aggregate increasing returns to scale, while selection and procompetitive effects are minor or negative. The Darwinian effect also leads to higher aggregate markups, increased industrial concentration, and a reduced labor share of income, implying that welfare improvements from market expansion may coincide with greater market concentration. The analysis further suggests that an entry subsidy can enhance welfare by leveraging Darwinian reallocations, even when entry exceeds the first-best level.