Monopoly and the incentive to innovate when adoption involves switchover disruptions

Thomas J. Holmes, David K. Levine, James A. Schmitz

Research output: Contribution to journalArticlepeer-review

19 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1-33
Number of pages33
JournalAmerican Economic Journal: Microeconomics
Volume4
Issue number3
DOIs
StatePublished - Dec 1 2012

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