The Economics of Innovation in the Telecommunications Industry

By John R. McNamara | Go to book overview

CHAPTER 9
Market Structure and Innovation

Technological change is often regarded as being exogenous to the economic system, influencing economic growth but not being itself subject to economic influence. This view of technological change is probably accepted more for reasons of convenience in constructing conventional economic models than for its validity.

Joseph Schumpeter was one of the first economists to study both the effects of technological change on the economic system, and the type of market structure most conducive to technological progress. He ( 1962) described a dynamic model of the capitalist economy in which the process of innovation, the ongoing introduction of new products into the marketplace, was the primary mechanism of competition. Schumpeter believed that the social benefits of dynamic economic efficiency, characterized by increasing industrial productivity and the competitive replacement of obsolete products by new products, are more important than the social benefits of the price competition usually emphasized in static economic theory.

Since only large firms possess the financial resources necessary for R&D programs and since such firms can take advantage of economies of scale and have greater ability to appropriate the profits resulting from their innovative efforts, Schumpeter believed that large firms were the most effective innovators and that the dynamic benefits of their innovative activities offset the decrease in economic efficiency due to their market power.

Schumpeter's views are ideologically charged because there is a traditional hostility to the power of large unregulated firms in the United

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