Monopolies & Innovation-(23.05.04)

One of the contradictions in competition policy is that monopolies are discouraged due to the consumer welfare loss that results from higher prices and restricted output, yet economic value is created by industries with dominant firms having higher levels of innovation than more competitive markets. This contradiction has often been partly explained by Schumpeter's process of creative destruction showing that monopoly power can be controlled by the proccess of technological change.

An alternative explanation is that competitve markets by their nature drive out innovation as an inefficiency. A lack of barriers to entry discourages any individual firm from innovating as they will encounter additional costs without being able to achieve additional profits for any length of time. Therefore it is hardly suprising that some degree of market concentration is required to encourage innovation. This depends on whether you believe innovation is important or not. Monopoly power is still an issue if the level of investment in research and development goes beyond that necessary. This in effect is the operation of monopoly power in creating a barrier to entry, even though that barrier is an ever changing one. The problem for regulators is always going to be whether market power benefits outweigh the costs.