Innovation and the Opportunity Cost of Monopoly
Managerial and Decision Economics
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.
“Innovation and the Opportunity Cost of Monopoly” (with Michael Reksulak and Robert D. Tollison), Managerial and Decision Economics 29(8) (December 2008), pp. 619–627.