Monopoly and Incentives to Cost-Reducing R&D

Abstract:     
It is here shown that there exist cost innovations for which a monopolist has a higher incentive to invest than a social planner. This unveils the limits of the claim, based on Arrow (1959), that a monopoly always has a lower incentive to innovate than a social planner and therefore than socially desirable. Contrary to previous results, the comparison of incentives may also depend upon the demand function. Finally, only under a restricted domain of analysis, a rule for comparing the monopoly and the social planner incentives is derived.

Number of Pages in PDF File: 10

Keywords: Monopoly, Research and Development, Innovation.

JEL Classification: L00, L10

working papers series