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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

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)

Suggested Citation

  • Thomas J. Holmes & David K. Levine & James A. Schmitz, 2012. "Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions," American Economic Journal: Microeconomics, American Economic Association, vol. 4(3), pages 1-33, August.
  • 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. Nicholas Bloom & Mirko Draca & John Van Reenen, 2016. "Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity," Review of Economic Studies, Oxford University Press, pages 87-117.
    2. Jeremy Greenwood & David Weiss, 2013. "Mining Surplus: Modeling James A. Schmitz's Link Between Competition and Productivity," Economie d'Avant Garde Research Reports 22, Economie d'Avant Garde.
    3. 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.
    4. GABLER, Alain & POSCHKE, Markus, 2011. "Growth through Experimentation," Cahiers de recherche 11-2011, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    5. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, pages 326-365.
    6. 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.
    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. 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.
    9. Davide Castellani & Giorgia Giovannetti, 2010. "Productivity and the international firm: dissecting heterogeneity," Journal of Economic Policy Reform, Taylor and Francis Journals, pages 25-42.
    10. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, pages 326-365.
    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. Shawn Klimek & James Schmitz & Timothy Dunne, 2010. "Does Foreign Competition Spur Productivity? Evidence From Post WWII U.S. Cement Manufacturing," 2010 Meeting Papers 805, Society for Economic Dynamics.
    13. Erik Brynjolfsson & Daniel Rock & Chad Syverson, 2018. "Artificial Intelligence and the Modern Productivity Paradox: A Clash of Expectations and Statistics," NBER Chapters,in: Economics of Artificial Intelligence National Bureau of Economic Research, Inc.
    14. Pérez, Carlos J. & Ponce, Carlos J., 2015. "Disruption costs, learning by doing, and technology adoption," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 64-75.
    15. Dan Andrews & Chiara Criscuolo, 2013. "Knowledge-Based Capital, Innovation and Resource Allocation," OECD Economics Department Working Papers 1046, OECD Publishing.
    16. Bridgman, Benjamin, 2015. "Competition, work rules and productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 136-149.
    17. Lei Fang, 2009. "Entry barriers, competition, and technology adoption," FRB Atlanta Working Paper 2009-08, Federal Reserve Bank of Atlanta.
    18. Erdal Yalcin & Davide Sala, 2014. "Uncertain Productivity Growth and the Choice between FDI and Export," Review of International Economics, Wiley Blackwell, vol. 22(1), pages 189-208, February.
    19. Norman Gemmel & Richard Kneller & Danny McGowan & Ismael Sanz, 2013. "Corporate Taxation and Productivity Catch-Up: Evidence from European Firms," Working Papers 13001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    20. Norman Gemmel & Richard Kneller & Danny McGowan & Ismael Sanz, 2013. "Corporate Taxation and Productivity Catch-Up: Evidence from European Firms," Working Papers 13001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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