what market structure is best for product or process innovation?

What market structure is best for product and/or process innovation and why among:

- Perfect Competition

- Monopolistic Competition

- Oligopoly

- Monopoly

it surely isn't perfect competition because all firms are price takers and all they change is the quantity produced.


4 Answers

  • 10 years ago
    Favorite Answer

    It is, in fact, perfect competition. If the market is owned by monopolistic competition (an oxymoron if ever there was one), oligopoly, or monopoly- what incentive is there to produce and/or innovate? EIther way, the monopoly is going to be paid, they may as well get paid for doing nothing. Furthermore, monopolies and oligopolies are RARE in competition and when they are formed, they collapse quickly. The reality of power versus the perception of power is confusing but apparent.

    In perfect competition, firms are FORCED to compete and innovate- if they don't, they won't be in competition for long. This is not to say that we have perfect competition in America, there are many many regulations and restrictions that impede competition. A simple example: When processed foods started in America in the nineteenth century, it was common for different companies to adulterate their foods- especially mayonnaise. Furthermore, these companies would put mayonnaise in bottles that would conceal the adulteration. When an entrepreneur named Henry J. Heinz came on the scene, he put his mayonnaise in see-through plastic and did not adulterate his mayonnaise. The result? Consumers SWARMED to Heinz's products and left the adulterated junk on the shelves. The other companies quickly STOPPED adulterating their mayonnaise and put it in transparent containers like Heinz. It was because of the innovation of Heinz, in perfect competition, that raised the standard of living for countless numbers of people- and it still does today.

    Another: In the late 1980s, a company named Smith-Corona held about 70% of the market for typewriters. Accordingly, SC made BILLIONS. However in the 1990s, with the invention of the Personal Computer, those billions of dollars of profit by SC, turned into billions of dollars of losses and they went out of business. This too, was done in perfect competition.

    Competition is THE way to get innovation and efficiency. Now let's see an example of monopoly (by all means, the logic is the same for oligopoly). In the late nineteenth century, the locomotive was fast becoming the most convenient and cost effective means of transportation over long distances. Between long distances, there were often many different routes to take and the competition lowered prices accordingly. It did happen that railroads would come together to try and fix prices (oligopoly) to increase revenue. However, as is always the case in attempts at oligopoly in perfect competition, the pools would collapse as one member would undercut their prices (usually in the form of subtle rebates) just below the others, take all the competition away from the other companies, and the pool would collapse.

    However, between shorter distances, such as Harrisburg and Pittsburgh, there was often only one rail that could provide transport. As such, these railways rose their prices and the rates for shorter distances were higher than the rates for longer distances. Competition is what reduced prices. However, when the Interstate Commerce Commission was established in 1897 and gained steam, so to speak, in 1901 to reduce this problem of higher costs, the ICC in fact RAISED the prices of longer travel. Everyone BUT the consumer was happy. The ICC had effectively regulated the monopoly for which they were called upon to end.

    Further still, when trucking became popular in the 1920s, competition ensued. Economists lauded what could be called "perfect competition." Anyone who owned a truck could go in business. As a result of the competition, prices substantially decreased. It would follow that the ICC was no longer necessary to prevent monopoly in the railroad industry due to competition from trucking. However, in the 1930s, the ICC got a hold of the trucking industry and raised rates of travel. Trucking companies now had to buy licenses to transport goods. Individuals who own these licenses made, literally, millions of dollars a year without owning a single truck; this happened up until the 1980s when the ICC was drastically reduced in it's operation capabilities. Consider: The ICC authorizes a truck to deliver freight from New York to Washington DC, not from Philadelphia to Baltimore despite the fact that these stops are on the way. The result is that a truck returns back to it's base empty while another truck is dispatched to take care of the second route. This was a grossly inefficient, but altogether common phenomenon on a wide scale, and contributed to higher pricing. Higher pricing led to a decline in the standards of living for consumers and no one was happy about it.

    Source(s): Short lesson: State granted monopolies and oligopolies always stymie innovation and efficiency, while competition tends to rise innovation and efficiency. If a firm in competition were inefficient and lacking in innovation, then they would be forced into bankruptcy. When monopolies and oligopolies form in perfect competition, through innovation and efficiency, it is nothing of which to be afraid. It is because they serve the consumer best that these firms become a monopoly. However, if a firm, or firms try to "set" a monopoly or oligopoly, it is destroyed through competition. In order to catch a thief, you need to set a thief. Hope this helps! Basic Economics by Tom Sowell: http://www.amazon.com/Basic-Economics-4th-Ed-Econo... Free to Choose by Milton Friedman: http://www.amazon.com/Free-Choose-Statement-Milton...
  • 10 years ago

    Answer: Perfect Competition: Firms are competing for business, so innovation or product improvements give firms an edge in the market. The goal in perfect competition is to edge your competitors out of business and grow your market share.

    In a monopolistic competition firms can become stagnate, example: US auto industry before competition with Japan.

    In a monopoly there is little need for improvement because you have a very limited ability to grow your market share.

    In an oligopoly it is again difficult to grow market share so the returns on innovation are limited.

  • meg
    Lv 7
    10 years ago

    If you look at the firms that do research and bring new products to market for example 3M Microsoft, Apple, Drug companies etc, none of them are price takers and many have patents on new product given to them by the government to prevent competition for a period of time. When the real world contradict theory, I believe empirical results,

  • John M
    Lv 7
    10 years ago

    Competition. The innovation is used to reduce costs. This allows them to take the same price as their competitors and earn a higher profit. They can also reduce price and buy market share.

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