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American Economic Journal: Microeconomics: Vol. 4 No. 3 (August 2012)

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Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions

Article Citation

Holmes, Thomas J., David K. Levine, and James A. Schmitz. 2012. "Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions." American Economic Journal: Microeconomics, 4(3): 1-33.

DOI: 10.1257/mic.4.3.1

Abstract

Arrow (1962) argued that since a monopoly restricts output relative to a competitive industry, it would be less willing to pay a fixed cost to adopt a new technology. We develop a new theory of why a monopolistic industry innovates less. Firms often face major problems in integrating new technologies. In some cases, upon adoption of technology, firms must temporarily reduce output. We call such problems switchover disruptions. A cost of adoption, then, is the forgone rents on the sales of lost or delayed production, and these opportunity costs are larger the higher the price on those lost units. (JEL D21, D42, L12, L14, O32, O33)

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Authors

Holmes, Thomas J. (U MN and Federal Reserve Bank of Minneapolis)
Levine, David K. (Washington U in St Louis)
Schmitz, James A. (Federal Reserve Bank of Minneapolis)

JEL Classifications

D21: Firm Behavior: Theory
D42: Market Structure and Pricing: Monopoly
L12: Monopoly; Monopolization Strategies
L14: Transactional Relationships; Contracts and Reputation; Networks
O32: Management of Technological Innovation and R&D
O33: Technological Change: Choices and Consequences; Diffusion Processes

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