Monopoly incentives for cost-reducing R&D

It is shown in this paper that there exist cost innovations for which a monopolist has a higher incentive to invest than a social planner. This unveils the limits of the claim, based on Arrow (1959), that a monopoly always has a lower incentive to innovate than a social planner and therefore than is socially desirable. In contrast to previous results, the comparison of incentives may also depend upon the demand function. Finally, for a restricted domain of analysis, a rule for comparing the monopoly and the social planner incentives is derived.

► I study the incentives to introduce a new technology by a monopolist. ► The analysis is restricted to cost innovations that increase welfare. ► The main result is that the monopoly may invest in R&D more than a social planner. ► This shows that claims based upon Arrow (1959) are not universal. ► A condition for the traditional result to obtain is provided, for a restricted domain of analysis.