TY  - JOUR
AU  - Holmes,Thomas J.
AU  - Levine,David K.
AU  - Schmitz,James A., Jr.
TI  - Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13864
PY  - 2008
Y2  - March 2008
UR  - http://www.nber.org/papers/w13864
L1  - http://www.nber.org/papers/w13864.pdf
N1  - Author contact info:
Thomas J. Holmes
Department of Economics
University of Minnesota
4-101 Hanson Hall
1925 Fourth Street South
Minneapolis, MN 55455
Tel: 612/625-4512
Fax: 612/624-0209
E-Mail: holmes@umn.edu

David K. Levine
EUI
Villa San Paolo
Via della Piazzuola 43
I-50133 Firenze
ITALY
Tel:  +39-333-542-6454
E-Mail: david@dklevine.com

James A. Schmitz, Jr.
Research Dept.
Federal Reserve Bank of Minneapolis
90 Hennepin Ave., PO Box 291
Minneapolis, MN 55480
E-Mail: jas@res.mpls.frb.fed.us
AB  - 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.
ER  -