Technology and innovation are considered as the second driving force in the economy. They may influence structure differently in different market structures. Some innovations build on competencies that established firms must already have in order to be active in the industry; however, other innovation that require additional competencies. The "destructive" power of an innovation depends on how "different" the competencies related to new technology is from the competencies of old technology (web). The purpose of this paper to explain how technology and innovations influence market structures.
Perfect Competition In a perfect competition firms do not have incentive for innovation. They do not earn profits and may not be able to get the money need to devote to research and development, which will lead to technological changes. A perfect competitive market would quickly transfer the gains of the innovation to other companies, making it hard for the innovating company to "recoup" the cost of the development of new technology (Colander, pg. 319). Monopolistic Competition Monopolistic Competition has more conducive to technology changes because the firm has some market power. The ideal of getting more market power gives the incentive to fund research in new technology.
Unfortunately, Monopolistic Competition lacks long-run profits. Their ability to recoup their investments in technology innovation is limited by easy entry of new companies. Due the United States support of patents Monopolistic Competition do not get incentives to innovate. Patents allow the development of new products through monopoly profits (Colander, pg. 319). Monopoly In a Monopoly market structure there is no incentive to innovate.
They earn the profit they need for research and development, and they do not face the threat of new competitors (Colander, pg. 319). Oligopoly Oligopoly market structure is the most conducive to technological changes due to the fact that they have the funds to carry out research and development. They are pushed by the fact that their competitors are innovating which forces them to be innovating as well. They are always looking for ways to get an edge on their competitors; therefore, most of technological advances take place in the oligopoly market structure (Colander, pg. 319).
In Conclusion, the market structure of a company is affect by technology and innovations. A perfect competition firm does not have incentive for innovation, Monopolistic Competition is more conducive to technology changes because they have some market power, Monopoly market structure do no have an incentive to innovate, the oligopoly offer an incentive to innovate. Therefore, as we see oligopoly provides the best market structure for technology. They have an incentive to innovate in the form of additional profits.
References: Colander, D. (2001). Microeconomics 4 th Ed. New York: McGraw-Hill OK Lotz, Peter. Interlocking technology and market structure: Stability in hearing instrument industry. Available online: web > References: Colander, D.
(2001). Microeconomics 4 th Ed. New York: McGraw-Hill OK Lotz, Peter. Interlocking technology and market structure: Stability in hearing instrument industry.
Available online: web.