Monday, June 08, 2009

A possible upside of a monopoly: increased innovation

Probably more of an economics article, but we deal with anti-trust issues in finance classes all the time too and it is such a good thought-provoking article I will include it:

Columbia Ideas At Work : Feature : The+Price+of+Competition: "Antitrust laws aim to protect consumers and spur innovation by fostering competition, but in some industries ingenuity thrives under monopolists.....

"Working with Ronald Goettler of the University of Chicago, Gordon studied the dynamics between the two firms and developed a mathematical model that allowed the researchers to predict Intel’s behavior if it were the sole microprocessor developer in the industry. The researchers were particularly interested, Gordon says, in determining the rate of technological innovation and whether consumers would be better or worse off if Intel had no competitors...."

Their conclusion?

"...Intel would innovate more rapidly if it weren’t competing with AMD.”

Great read. Not sure if I agree or not, but definitely one that will make me think for a long time! At least after one read I don't think I agree. The arguments seemingly hinges on whether the incentive to make a new sale (and hence have a new product/upgrade to sell) is sufficient to overwhelm the incentive to overpay executives and pay out dividends to shareholders.

BTW an interesting factoid that can be used in class easily:
"Between 2000 and 2003, for example, the U.S. Department of Justice and the FTC challenged 109 mergers; in 41 of these cases, they cited slower projected innovation rates as the reason for challenging the mergers"

Thanks @Columbia_Biz for the heads up on this one.

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