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Innovation and the opportunity cost of monopoly
Author(s) -
Reksulak Michael,
Shughart William F.,
Tollison Robert D.
Publication year - 2008
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1425
Subject(s) - monopoly , economics , marginal cost , microeconomics , deadweight loss , economic surplus , competition (biology) , value (mathematics) , market power , social welfare , welfare , marginal value , social cost , opportunity cost , industrial organization , market economy , ecology , machine learning , computer science , political science , law , biology
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.