Computers, productivity and market structure

Since the 1970's most industrialized countries have undertaken massiveinvestment in computers and information technology (IT). Several stylizedfacts emerge from the empirical studies, see Landauer, 1993. In particular,they have found that this investment has not lead to a general increase intotal factor productivity. This is known as the "productivity paradox". Also,some apparently inconsistent findings do emerge from these studies. Inparticular, the initial introduction of new IT by a firm tends to increase itsmarket share, and finally, there is evidence that while in most industriesproductivity has failed to increase, in monopolistic and regulated industriesthere is evidence that computers and IT have increased productivity. Wepresent a simple economic model of IT innovation. We find that in the model,measured productivity gains depends on rnarket structure. In fact the"productivity paradox" is most likely to emerge in markets dominated by asmall number of firms. It cannot emerge in either monopoly or highlycompetitive markets.