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Innovation and the opportunity cost of monopoly

Author

Listed:
  • Michael Reksulak

    (School of Economic Development, Georgia Southern University, Statesboro, GA, USA)

  • William F. Shughart

    (Department of Economics, The University of Mississippi, University, MS, USA)

  • Robert D. Tollison

    (Department of Economics, Clemson University, Clemson, SC, USA)

Abstract

Innovation enables monopolists to lower their costs, expand their outputs, and reduce their prices. It is conventional to conclude that social welfare unambiguously increases as a result. Assuming linear demand and marginal cost, this paper shows, however, that innovation raises the opportunity cost of monopoly: as a firm enjoying market power becomes more efficient, greater amounts of surplus are sacrificed by consumers because of the progressive monopolist's failure to produce the new, larger competitive output. Innovation, in other words, increases the social value of competition by raising the deadweight cost of monopoly. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • Michael Reksulak & William F. Shughart & Robert D. Tollison, 2008. "Innovation and the opportunity cost of monopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(8), pages 619-627.
    • Handle: RePEc:wly:mgtdec:v:29:y:2008:i:8:p:619-627
    DOI: 10.1002/mde.1425
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    References listed on IDEAS

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    Cited by:

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    2. Levin, Mark (Левин, Марк) & Matrosova, Kseniya (Матросова, Ксения), 2017. "Development and Analysis of Economic Models of Innovation Incentives [Разработка И Исследование Экономических Моделей Стимулирования Инновационных Процессов]," Working Papers 061713, Russian Presidential Academy of National Economy and Public Administration.
    3. Yao, Shuntian & Gan, Lydia, 2010. "Monopoly innovation and welfare effects," Economics Discussion Papers 2010-10, Kiel Institute for the World Economy (IfW Kiel).
    4. Genlong Guo & Shoude Li, 2023. "A dynamic analysis of a monopolist's efforts for improving product quality and process innovation with reference price effects under linear demand," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2328-2345, June.
    5. Cao, Lanlan & Li, Li, 2018. "Determinants of Retailers' Cross-channel Integration: An Innovation Diffusion Perspective on Omni-channel Retailing," Journal of Interactive Marketing, Elsevier, vol. 44(C), pages 1-16.
    6. Federico Etro, 2006. "Market Leaders and Industrial Policy," Working Papers 103, University of Milano-Bicocca, Department of Economics, revised Nov 2006.
    7. Shuntian Yao & Lydia L. Gan, 2006. "The Welfare Effects of Monopoly Innovation," Economic Growth Centre Working Paper Series 0609, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.

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