March 7, 2017

Antitrust and Economic Efficiency by Charles K. Rowley

By Charles K. Rowley

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The competitive industry would pay a total royalty equal to P' to the inventor, while the monopoly would pay half this amount. This is the normal restrictive effect of non-discriminating monopoly, which Demsetz proceeded to remove by defining MR in Fig. 5 to be the demand curve facing the competitive industry. For any given unit cost, both the monopoly and the competitive industry would produce the same output rate and would both pay the same total royalty to the inventor. There would be no special adverse effect of monopoly on the incentive to invention.

In terms of our social welfare function also there is some loss of consumers' surplus and some loss of scale economies as a result of the divergence between price and marginal cost, and some loss of scale economies as a result of the divergence between marginal cost and long-run average cost. It is not possible to determine by a priori discussion whether monopolistic competition is superior or inferior to perfect competition as a welfare-maximising agency since scale economies might be achieved in the former but sacrificed in the latter solution as the price for the gain in consumers' surplus.

Lture. In so far as scale economies do exist in the innovation 42 process - and if they are limited in invention there is good reason to believe that they are significant in development - it might be thought that this alone would support the case for monopoly in the overall welfare trade-off. As with scale economies in production, however, this is too simple. For Xinefficiency is likely to strike just as much at the inventive as at the productive processes of the monopolistic firm. Indeed, Leibenstein [43] has applied the X-inefficiency hypothesis specifically to the inventive processes, and his analysis certainly complements other contributions which have emphasised the incentive aspects of competition in invention and innovation.

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