Monopoly and the incentive to innovate when adoption involves switchover disruptions

Thomas Holmes (), David Levine and James Schmitz

No 402, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: When considering the incentive of a monopolist to adopt an innovation, the textbook model assumes that it can instantaneously and seamlessly introduce the new technology. In fact, firms often face major problems in integrating new technologies. In some cases, firms have to (temporarily) produce at levels substantially below capacity upon adoption. We call such phenomena switchover disruptions, and present extensive evidence on them. If firms face switchover disruptions, then they may temporarily lose some unit sales upon adoption. If the firm loses unit sales, then a cost of adoption is the foregone rents on the sales of those units. Hence, greater market power will mean higher prices on those lost units of output, and hence a reduced incentive to innovate. We introduce switchover disruptions into some standard models in the literature, show they can overturn some famous results, and then show they can help explain evidence that firms in more competitive environments are more likely to adopt technologies and increase productivity.

Date: 2008
New Economics Papers: this item is included in nep-com, nep-ino, nep-mic and nep-tid
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Citations: View citations in EconPapers (18)

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Related works:
Journal Article: Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions (2012)
Working Paper: Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions (2008)
Working Paper: Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:402

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