Creator: Holmes, Thomas J., Levine, David K., and Schmitz, James Andrew Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 402 Abstract:
Arrow (1962) argued that since a monopoly restricts output relative to a competitive industry, it would be less willing to pay a fixed cost to adopt a new technology. Arrow’s idea has been challenged and critiques have shown that under different assumptions, increases in competition lead to less innovation. We develop a new theory of why a monopolistic industry innovates less than a competitive industry. The key is that firms often face major problems in integrating new technologies. In some cases, upon adoption of technology, firms must temporarily reduce output. We call such problems switchover disruptions. If firms face switchover disruptions, then a cost of adoption is the forgone rents on the sales of lost or delayed production, and these opportunity costs are larger the higher the price on those lost units. In particular, with greater monopoly power, the greater the forgone rents. This idea has significant consequences since if we add switchover disruptions to standard models, then the critiques of Arrow lose their force: competition again leads to greater adoption. In addition, we show that our model helps explain the accumulating evidence that competition leads to greater adoption (whereas the standard models cannot).
Subject (JEL): O32 - Management of Technological Innovation and R&D, O33 - Technological Change: Choices and Consequences; Diffusion Processes, L14 - Transactional Relationships; Contracts and Reputation; Networks, D21 - Firm Behavior: Theory, L12 - Monopoly; Monopolization Strategies, and D42 - Market Structure, Pricing, and Design: Monopoly
Creator: Han, Suyoun and Kleiner, Morris Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 556 Abstract:
The length of time from the implementation of an occupational licensing statute (i.e., licensing duration) may matter in influencing labor market outcomes. Adding to or raising the entry barriers are likely easier once an occupation is established and has gained influence in a political jurisdiction. States often enact grandfather clauses and ratchet up requirements that protect existing workers and increase entry costs to new entrants. We analyze the labor market influence of the duration of occupational licensing statutes for 13 major universally licensed occupations over a 75-year period. These occupations comprise the vast majority of workers in these regulated occupations in the United States. We provide among the first estimates of potential economic rents to grandfathering. We find that duration years of occupational licensure are positively associated with wages for continuing and grandfathered workers. The estimates show a positive relationship of duration with hours worked, but we find moderately negative results for participation in the labor market. The universally licensed occupations, however, exhibit heterogeneity in outcomes. Consequently, unlike some other labor market public policies, such as minimum wages or direct unemployment insurance benefits, occupational licensing would likely influence labor market outcomes when measured over a longer period of time.
Keyword: Workforce participation, Labor market regulation, Occupational licensing, Duration and grandfathering effects on wage determination, and Hours worked Subject (JEL): J44 - Professional Labor Markets; Occupational Licensing, L84 - Personal, Professional, and Business Services, J80 - Labor Standards: General, J30 - Wages, Compensation, and Labor Costs: General, L38 - Public Policy, K20 - Regulation and Business Law: General, K00 - Law and Economics: General, J88 - Labor Standards: Public Policy, J08 - Labor Economics Policies, J38 - Wages, Compensation, and Labor Costs: Public Policy, L51 - Economics of Regulation, L88 - Industry Studies: Services: Government Policy, and L12 - Monopoly; Monopolization Strategies
Creator: Gowrisankaran, Gautam and Holmes, Thomas J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 264 Abstract:
Will an industry with no antitrust policy converge to monopoly, competition or somewhere in between? We analyze this question using a dynamic dominant firm model with rational agents, endogenous mergers and constant returns to scale production. We find that perfect competition and monopoly are always steady states of this model and that there may be other steady states with a dominant firm and a fringe co-existing. Mergers are likely only when supply is inelastic or demand is elastic, suggesting that the ability of a dominant firm to raise price through monopolization is limited. Additionally, as the discount rate increases, it becomes harder to monopolize the industry, because the dominant firm cannot commit to not raising prices in the future.
Keyword: Dynamics, Merger, and Dominant Firm Subject (JEL): L12 - Monopoly; Monopolization Strategies and L41 - Monopolization; Horizontal Anticompetitive Practices