Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions
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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)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.4.3.1JEL Classification
- 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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