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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 Jr

Abstract

When considering the incentive of a monopolist to adopt an innovation, the textbook model assumes that it can instantaneously and seamlessly introduce the new technology. In fact, firms often face major problems in integrating new technologies. In some cases, firms have to (temporarily) produce at levels substantially below capacity upon adoption. We call such phenomena switchover disruptions, and present extensive evidence on them. If firms face switchover disruptions, then they may temporarily lose some unit sales upon adoption. If the firm loses unit sales, then a cost of adoption is the foregone rents on the sales of those units. Hence, greater market power will mean higher prices on those lost units of output, and hence a reduced incentive to innovate. We introduce switchover disruptions into some standard models in the literature, show they can overturn some famous results, and then show they can help explain evidence that firms in more competitive environments are more likely to adopt technologies and increase productivity.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 122247000000001920.

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Date of creation: 29 Feb 2008
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Handle: RePEc:cla:levarc:122247000000001920

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  1. Reinganum, Jennifer R., 1982. "Uncertain Innovation and the Persistence of Monopoly," Working Papers 431, California Institute of Technology, Division of the Humanities and Social Sciences.
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Citations

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Cited by:
  1. Davide Castellani & Giorgia Giovannetti, 2009. "Productivity and the international firm: dissecting heterogeneity," Development Working Papers 270, Centro Studi Luca d\'Agliano, University of Milano.
  2. Timothy Dunne & Shawn Klimek & James Schmitz, Jr., 2010. "Competition and Productivity: Evidence from the Post WWII U.S. Cement Industry," Working Papers 10-29, Center for Economic Studies, U.S. Census Bureau.
  3. GABLER, Alain & POSCHKE, Markus, 2011. "Growth through Experimentation," Cahiers de recherche 11-2011, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  4. Gemmell, Norman & Kneller, Richard & McGowan, Danny & Sanz, Ismael & Sanz-Sanz, José F., 2013. "Corporate Taxation and Productivity Catch-Up: Evidence from European firms," Working Paper Series 2705, Victoria University of Wellington, Chair in Public Finance.
  5. Dan Andrews & Chiara Criscuolo, 2013. "Knowledge-Based Capital, Innovation and Resource Allocation," OECD Economics Department Working Papers 1046, OECD Publishing.
  6. Chad Syverson, 2010. "What Determines Productivity?," NBER Working Papers 15712, National Bureau of Economic Research, Inc.
  7. Carl Shapiro, 2011. "Competition and Innovation: Did Arrow Hit the Bull’s Eye?," NBER Chapters, in: The Rate and Direction of Inventive Activity Revisited, pages 361-404 National Bureau of Economic Research, Inc.
  8. Nicholas Bloom & Mirko Draca & John Van Reenen, 2011. "Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity," CEP Discussion Papers dp1000, Centre for Economic Performance, LSE.
  9. Erdal Yalcin, 2009. "Uncertain Productivity Growth and the Choice between FDI and Export," CESifo Working Paper Series 2773, CESifo Group Munich.
  10. Lei Fang, 2009. "Entry barriers, competition, and technology adoption," Working Paper 2009-08, Federal Reserve Bank of Atlanta.
  11. Sanghamitra Das & Kala M. Krishna & Sergey Lychagin & Rohini Somanathan, 2011. "Lifting the Veil: The Face of TFP in an Indian Rail Mill," CESifo Working Paper Series 3515, CESifo Group Munich.
  12. Alain Gabler & Markus Poschke, 2013. "Experimentation by Firms, Distortions, and Aggregate Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 26-38, January.

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