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Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions

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  • Thomas J. Holmes
  • David K. Levine
  • James A. Schmitz
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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)

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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

    Volume (Year): 4 (2012)
    Issue (Month): 3 (August)
    Pages: 1-33

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    Handle: RePEc:aea:aejmic:v:4:y:2012:i:3:p:1-33

    Note: DOI: 10.1257/mic.4.3.1
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    Cited by:
    1. Carlos J.Pérez & Carlos J.Ponce, 2013. "Disruption costs and the choice of technology," ILADES-Georgetown University Working Papers inv292, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.

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