The vast majority of economic growth is caused by innovation. So when it comes to long term policy, innovation is almost the entire game – whatever policy causes substantially more innovation is probably better, even if has many other big downsides.
"In general, industries that are more concentrated, i.e., more in the direction of having a monopolist, have more patents, all else equal. This seems to be because they invest more in R&D."
Are you sure it's not the reverse: patents (especially the silly ones that don't actually contribute to innovation, like Apple's patent on rectangles with rounded edges) helping to form monopolies?
AT&T had a government sanctioned monopoly. They had to deliver somewhat to stay on good terms with the US government. They're not a good example either way (the US government may have pressured them to innovate but also prevented manic behavior).
I kinda agree with Doug here. In many industries it would be viable to innovate cut costs but keep prices the same. In fact I raised a similar concern myself in another comment. Society as a whole would innovate and perhaps faster than it does now (if your theory is correct). But relatively little of this innovation would reach consumers and as a consequence the owners of the monopolies would capture an ever increasing portion of the total income.
AT&T may not have delivered on picture phones, but through its division Bell Labs it gave the world transistors, the first American satellite, cellular telephony, early work on radar, and a lot of advances of telephones, in addition to the fiber optics you cite. See: The Idea Factory by Jon Gertner.
Yes, there is a static monopolist loss from excluded customers, and that loss depends on the demand elasticity. Innovation would increase demand and lower cost, to produce more total profits, consumer surplus, and loss But there is no particular reason to expect the loss to increase as a fraction of the total, nor to expect that to depend on the elasticity. The simple thing to expect is that the whole curve just scales up.
Surely you must subscribe to the standard microecon analysis of monopolies. Monopoly equilibrium occurs at the intersection of the supply curve (S) and marginal revenue (MR). MR is twice the slope of the demand curve (D). Innovation results in a right shift of S. For the same shift in S, monopoly equilibrium results in 0.5*dQ as competitive equilibrium.
Therefore standard micro tells us that innovation in monopolized markets results in an increase of deadweight loss. An increase in deadweight loss proves that monopolies don't fully internalize the benefits of innovation. Deadweight loss decreases monotonically with demand elasticity. Therefore innovation is most disincentived for monopolies in highly inelastic markets.
This isn't to say that monopolies can't promote innovation relative to competitive markets. Even without deadweight loss, if innovation spills over, those reaping the marginal consumer/producer surplus may be free riders. But there's clearly a cost-benefit tradeoff to monopoly innovation between public goods provision and deadweight loss, and it will highly vary depending on the market and industry. Monopolies can be a tool to promote innovation, but they're no silver bullet.
This whole discussion seems to be skipping past the concept of consumer demand elasticity. If demand elasticity for the industry > 1, then a manic monopolist would indeed innovate like a madman. Computers are a good example here, at least from 1970->2010 falling prices for computer power has resulted in an explosion of demand for computers. Competitive computer markets probably do underinvest in innovation relative to monopolists.
But many industries have demand elasticity < 1. Food's a good example, drastically falling prices for food has resulted in the food industry's share of GDP falling from ~50% to 2% in the past two centuries. A manic monopolist in food might innovate to lower his cost, but he'd keep income-adjusted prices around 1800 levels. Relative to a competitive market almost all innovation enhancement would be lost to economic deadweight. Consequently a monopolist in this industry would highly underinvest.
AT&T circa 1975 probably understood telecom as a inelastic product. That seems silly from today's perspective, because most telecom today is data driven. And demand for data in highly elastic. But that's not the case when telecom demand is voice driven.
Alchian seems applicable here. As he notes, companies are not profit maximizers but only trying to do relatively better than their competitors. Also intrafirm transaction costs seem to suggest that such a firm wouldn't be able to achieve the manic moniker.
I guess it doesn't matter how you define an "industry". What would matter in practice is to what degree a firm would be able to get away with no innovation of their products and services. Obviously they would still innovate to cut costs but Ithink you need some kind of competition to transfer that innovation to the product/service itself and/or lower the price for the consumer. Cost-cutting innovation probably has environmental advantages so it's worth something, but at some point you want the consumer to benefit as well instead of being stuck with an ever decreasing portion of the total purchasing power.
Right. My point is that big, strong, highly profitable firms are easy targets for government, right?
Take the electronics contract manufacturing industry. Highly competitive, many firms, low margin. Horrible target for govt rent seekers, cause they'll kill a company before they can take anything.
But you could cut a bunch of slabs of meat off Google w/ out anybody noticing.
What if most economic activity was conducted by large, enormously profitable, dominant firms.
A mandate to be manic enforced by the government doesn't sound promising. Making it easy for raiders to buy the monopoly, and letting those raiders change anything they want to, sounds more promising.
"In general, industries that are more concentrated, i.e., more in the direction of having a monopolist, have more patents, all else equal. This seems to be because they invest more in R&D."
Are you sure it's not the reverse: patents (especially the silly ones that don't actually contribute to innovation, like Apple's patent on rectangles with rounded edges) helping to form monopolies?
What does manic mean, and how do we make sure they're manic?
AT&T had a government sanctioned monopoly. They had to deliver somewhat to stay on good terms with the US government. They're not a good example either way (the US government may have pressured them to innovate but also prevented manic behavior).
I kinda agree with Doug here. In many industries it would be viable to innovate cut costs but keep prices the same. In fact I raised a similar concern myself in another comment. Society as a whole would innovate and perhaps faster than it does now (if your theory is correct). But relatively little of this innovation would reach consumers and as a consequence the owners of the monopolies would capture an ever increasing portion of the total income.
AT&T may not have delivered on picture phones, but through its division Bell Labs it gave the world transistors, the first American satellite, cellular telephony, early work on radar, and a lot of advances of telephones, in addition to the fiber optics you cite. See: The Idea Factory by Jon Gertner.
Don't forget Sputnik. Less annual, more generational.
Yes, there is a static monopolist loss from excluded customers, and that loss depends on the demand elasticity. Innovation would increase demand and lower cost, to produce more total profits, consumer surplus, and loss But there is no particular reason to expect the loss to increase as a fraction of the total, nor to expect that to depend on the elasticity. The simple thing to expect is that the whole curve just scales up.
Surely you must subscribe to the standard microecon analysis of monopolies. Monopoly equilibrium occurs at the intersection of the supply curve (S) and marginal revenue (MR). MR is twice the slope of the demand curve (D). Innovation results in a right shift of S. For the same shift in S, monopoly equilibrium results in 0.5*dQ as competitive equilibrium.
Therefore standard micro tells us that innovation in monopolized markets results in an increase of deadweight loss. An increase in deadweight loss proves that monopolies don't fully internalize the benefits of innovation. Deadweight loss decreases monotonically with demand elasticity. Therefore innovation is most disincentived for monopolies in highly inelastic markets.
This isn't to say that monopolies can't promote innovation relative to competitive markets. Even without deadweight loss, if innovation spills over, those reaping the marginal consumer/producer surplus may be free riders. But there's clearly a cost-benefit tradeoff to monopoly innovation between public goods provision and deadweight loss, and it will highly vary depending on the market and industry. Monopolies can be a tool to promote innovation, but they're no silver bullet.
http://upload.wikimedia.org...
Sorry, this is completely wrong.
I am not entirely sure what that word means. More importantly, how do you ensure that the monopolies will be manic?
It sounds familiar to what Porfirio Diaz did back in early 1900s in Mexico. Look where they are now.
This whole discussion seems to be skipping past the concept of consumer demand elasticity. If demand elasticity for the industry > 1, then a manic monopolist would indeed innovate like a madman. Computers are a good example here, at least from 1970->2010 falling prices for computer power has resulted in an explosion of demand for computers. Competitive computer markets probably do underinvest in innovation relative to monopolists.
But many industries have demand elasticity < 1. Food's a good example, drastically falling prices for food has resulted in the food industry's share of GDP falling from ~50% to 2% in the past two centuries. A manic monopolist in food might innovate to lower his cost, but he'd keep income-adjusted prices around 1800 levels. Relative to a competitive market almost all innovation enhancement would be lost to economic deadweight. Consequently a monopolist in this industry would highly underinvest.
AT&T circa 1975 probably understood telecom as a inelastic product. That seems silly from today's perspective, because most telecom today is data driven. And demand for data in highly elastic. But that's not the case when telecom demand is voice driven.
Alchian seems applicable here. As he notes, companies are not profit maximizers but only trying to do relatively better than their competitors. Also intrafirm transaction costs seem to suggest that such a firm wouldn't be able to achieve the manic moniker.
I guess it doesn't matter how you define an "industry". What would matter in practice is to what degree a firm would be able to get away with no innovation of their products and services. Obviously they would still innovate to cut costs but Ithink you need some kind of competition to transfer that innovation to the product/service itself and/or lower the price for the consumer. Cost-cutting innovation probably has environmental advantages so it's worth something, but at some point you want the consumer to benefit as well instead of being stuck with an ever decreasing portion of the total purchasing power.
Right. My point is that big, strong, highly profitable firms are easy targets for government, right?
Take the electronics contract manufacturing industry. Highly competitive, many firms, low margin. Horrible target for govt rent seekers, cause they'll kill a company before they can take anything.
But you could cut a bunch of slabs of meat off Google w/ out anybody noticing.
What if most economic activity was conducted by large, enormously profitable, dominant firms.
What constrains government influence then?
A mandate to be manic enforced by the government doesn't sound promising. Making it easy for raiders to buy the monopoly, and letting those raiders change anything they want to, sounds more promising.