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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

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.

Suggested Citation

  • Thomas J. Holmes & David K. Levine & James A. Schmitz, . "Monopoly and the incentive to innovate when adoption involves switchover disruptions," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:402
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Chad Syverson, 2011. "What Determines Productivity?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 326-365, June.
    3. Davide Castellani & Giorgia Giovannetti, 2010. "Productivity and the international firm: dissecting heterogeneity," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 13(1), pages 25-42.
    4. 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.
    5. Myeongwan Kim, 2019. "Does Import Competition Reduce Domestic Innovation? Evidence from the 'China Stock' and Firm-Level Data on Canadian Manufacturing," CSLS Research Reports 2019-03, Centre for the Study of Living Standards.
    6. Müge Adalet McGowan & Dan Andrews & Valentine Millot, 2017. "Insolvency Regimes, Technology Diffusion and Productivity Growth: Evidence from Firms in OECD Countries," OECD Economics Department Working Papers 1425, OECD Publishing.
    7. Bridgman, Benjamin, 2015. "Competition, work rules and productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 136-149.
    8. Dieter Grass & Richard F. Hartl & Peter M. Kort, 2012. "Capital Accumulation and Embodied Technological Progress," Journal of Optimization Theory and Applications, Springer, vol. 154(2), pages 588-614, August.
    9. Myeongwan Kim, 2019. "Does Import Competition Reduce Domestic Innovation? Evidence from the 'China Stock' and Firm-Level Data on Canadian Manufacturing," CSLS Research Reports 2019-03, Centre for the Study of Living Standards.
    10. 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.
    11. Markus Poschke & Alain Gabler, 2011. "Growth through Experimentation," 2011 Meeting Papers 643, Society for Economic Dynamics.
    12. Lei Fang, 2017. "Entry Barriers, Competition, And Technology Adoption," Economic Inquiry, Western Economic Association International, vol. 55(2), pages 794-805, April.
    13. 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.
    14. Davide Castellani & Giorgia Giovannetti, 2010. "Productivity and the international firm: dissecting heterogeneity," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 13(1), pages 25-42.
    15. 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.
    16. Dan Andrews & Chiara Criscuolo, 2013. "Knowledge-Based Capital, Innovation and Resource Allocation," OECD Economics Department Working Papers 1046, OECD Publishing.

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