Working Paper: NBER ID: w13864
Authors: Thomas J. Holmes; David K. Levine; James A. Schmitz Jr.
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.
Keywords: Monopoly; Innovation; Switchover Disruptions
JEL Codes: L10; L12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monopolists may choose not to innovate (D42) | Preserve lucrative position (L21) |
| Greater market power (D49) | Higher prices on lost output (E31) |
| Higher prices on lost output (E31) | Reduced incentive to innovate (O39) |
| Switchover disruptions (J63) | Temporary loss of unit sales (E32) |
| Temporary loss of unit sales (E32) | Cost of adoption (foregone rents) (J17) |
| Increasing market power (D49) | Decrease in incumbent's incentive to innovate (when demand is elastic) (D43) |
| Switchover disruptions + Increasing market power (D49) | Strengthened decrease in incumbent's incentive to innovate (O39) |
| Switchover disruptions (J63) | Decrease in industry innovation (when disruptions are significant) (O39) |