A model is presented in which scale economies give market production a cost advantage over household production, but in which market production is limited by the extent of the market. The production process is viewed as a series of stages, each further refining and specializing the product of the previous stage. As processing proceeds, the number of intermediate goods increases and markets thin out. Firms specialize in the early stages of production and house-holds in the later stages. As an economy grows, production shifts out of households and into the market. Several other changes associated with economic development are also accounted for.

We present models in which price discrimination in the context of a two-part price can occur in some competitive markets. Purchases take place in groups, which choose which firms to patronize. While firms are perfectly competitive with respect to groups, they have some market power over individual consumers, who are constrained by their groups' choices. We find that firms will charge an entry fee that is below marginal cost, and the second part of the price is marked up above marginal cost. The markup not only is positive but increases with the quality of the product.