《技术创新管理》课程教学课件（英文）Market structure and innovation

Market structureandinnovationDr.MScBertSadowskiTechnischeUniversiteitTUeEindhovenUniversity of TechnologyWhere innovation starts

Market structure and innovation Dr. MSc Bert Sadowski

StatementsMonopolistic markets are notalways badforinnovations!Mostmarketshaveoligopolisticmarketstructures!Itis important howthe industryis defined!Nowyoubecomeareal economist!TechnischeUniversiteitTUEindhoveneUniversityofTechnologyPAGE19/29/2013EconomicsofInnovation2013

Statements • Monopolistic markets are not always bad for innovations! • Most markets have oligopolistic market structures! • It is important how the industry is defined! Economics of Innovation 2013 9/29/2013 PAGE 1 Now you become a real economist!

StructureMonopolistic Market Structures and InnovationEmpiricalperspectivesonmarketstructureandinnovationRecentdevelopmentsonmarketstructureandinnovationExample:Pharmaceutical IndustryandInnovationTechnische UniversiteitTUEindhovenJUniversityofTechnologyEconomics9/29/20132ofInnovation2013

Structure • Monopolistic Market Structures and Innovation • Empirical perspectives on market structure and innovation • Recent developments on market structure and innovation • Example: Pharmaceutical Industry and Innovation 9/29/2013 Economics of Innovation 2013 2

Monopolistic markets are not always bad forinnovation!Technische UniversiteitTUEindhoveneUniversityofTechnology9/29/2013PAGE3EconomicsofInnovation2013

Monopolistic markets are not always bad for innovation! Economics of Innovation 2013 9/29/2013 PAGE 3

MonopolisticMarket StructuresandInnovationTechnische UniversiteitTUEindhoveneUniversityofTechnology9/29/2013PAGE4EconomicsofInnovation2013

MONOPOLY Monopolistic Market Structures and Innovation Economics of Innovation 2013 9/29/2013 PAGE 4

Firms need monopolyprofits to innovateAC,=MC,PIMonopolisticprofitsduetolegalBprotection,entrybarriers,etc.P2DWLAC2=MC2PsDMRTechnischeUniversiteitTUQ2Q3Q1eEipdhovenUniversityofTechnologyEconomics9/29/20135of Innovation2013

9/29/2013 Economics of Innovation 2013 5 Firms need monopoly profits to innovate MR AC2 = MC2 Q $ Q3 P3 D Q2 C P2 B DWL Monopolistic profits due to legal protection, entry barriers, etc. AC1 = MC1 P1 Q1

But:Market Structure and Innovation?Question:Whichmarketstructureprovidesmoreincentives forinnovation?.K.Arrow:Competitivemarketsprovidealwayshigherincentivesforinnovationcomparedtomonopolisticmarkets(whateverkindofcostreducinginnovation)J.A.Schumpeter:CompetitiveandmonopolisticmarketscanbothbeconduciveforinnovationTechnische UniversiteitTUEindhoven-UniversityofTechnologyPAGE69/29/2013EconomicsofInnovation2013

But: Market Structure and Innovation? • K. Arrow: Competitive markets provide always higher incentives for innovation compared to monopolistic markets (whatever kind of cost reducing innovation) • J.A. Schumpeter: Competitive and monopolistic markets can both be conducive for innovation Economics of Innovation 2013 9/29/2013 PAGE 6 Question: Which market structure provides more incentives for innovation?

K.Arrow:Market Structure and InnovationInnovationisapublicgoodaimedatknowledgeproduction:Publicgood(non-excludable,non-rival)Innovation>productionofnewknowledgewhichisassimilated as information>turns into private goodKeyproblem>Appropriability:onceproduced,as itdifficult for producers to appropriate benefits that flowfrom itProducersofknowledgewantfull ownershipofnewpieceofknowledgeTwocases:Minorandmajorinvention (costs)TechnischeUniversiteitTUEindhovenUniversityofTechnologyEconomics9/29/2013of Innovation2013

9/29/2013 Economics of Innovation 2013 7 K. Arrow: Market Structure and Innovation • Innovation is a public good aimed at knowledge production: • Public good (non-excludable, non-rival) • Innovation > production of new knowledge which is assimilated as information > turns into private good • Key problem > Appropriability: once produced, as it difficult for producers to appropriate benefits that flow from it • Producers of knowledge want full ownership of new piece of knowledge • Two cases: Minor and major invention (costs)

K.Arrow:The case of a minor inventionsMonopolisticFirmIncentives(AreaI)DPmFirm in competitiveIncentive(AreaI+Il)marketP'mAreaIIIDWLPoCoIIGCIncentivesforfirmsincompetitivemarketHhigher(areasIand ll)JTechnische Universiteit0TUMoM,QoQieEipdhovenUniversity of TechnologyEconomics9/29/20138of Innovation2013

9/29/2013 Economics of Innovation 2013 8 K. Arrow: The case of a minor invention J C1 Q $ Q1 G D Qo 0 H P0 A F D P’m Pm C0 E M0 M1 I II III Incentives for firms in competitive market higher (areas I and II) Monopolistic Firm Firm in competitive market Area III DWL Incentives (Area I) Incentive (Area I + II)

K.Arrow:The case of aminor inventionLogicoftheargument:Innovation>smalldecreaseincosts(Co<C1)Competitivefirm:keepsprice,increasesoutput,actsasamonopoly(MR=Price)Monopolisticfirm:lowersprice,lessincentivetoproduce innovationBenefits:monopoly (l)<competitivefirm (I/ll)<socialplanner (/l/lll)Technische UniversiteitTUEindhovenUniversity of TechnologyEconomics9/29/20139ofInnovation2013

9/29/2013 Economics of Innovation 2013 9 K. Arrow: The case of a minor invention • Logic of the argument: • Innovation > small decrease in costs (C0 < C1) • Competitive firm: keeps price, increases output, acts as a monopoly (MR = Price) • Monopolistic firm: lowers price, less incentive to produce innovation • Benefits: monopoly (I) < competitive firm (I/II) < social planner (I/II/III)