Static and Dynamic Efficiency
If other things were equal, would monopoly result in a less efficient allocation of resources than competitive markets?
However, it is also important to compare market structures in terms of their performance over time. We could describe this as dynamic efficiency. Two important dimensions of dynamic efficiency are:
1 innovation in processes of production
2 new product innovation
Two plausible stories can be told here.
(a)Competitive markets have a superior innovative performance because the force of competition encourages firms to innovate to protect their profits, and indeed to survive. Insulation from competition implies that the incentive to innovate is lower for a monopolist.
(b)Monopolistic markets are superior innovators because of
- superior access to capital resources;
- less uncertainty and risk in the market, leading to a climate more conducive to innovation;
- scale economies in research and development activity;
- the ability to prevent others benefiting from the firm’s own new ideas, which encourages the firm to devote resources to innovation.
The available empirical evidence is not conclusive about which type of market has a superior dynamic performance. It is sometimes claimed that the success of the Japanese and West German manufacturing industries in the 1960s and 1970s is a consequence of competitive industrial structures. But close scrutiny makes it clear that these economies are far from perfectly competitive in the textbook senses, and it is at least as likely that the key to their performances lies in particular (and unique) configurations of cultural, institutional and historical circumstances. Once dynamic efficiency is brought into consideration, the relative merits of competitive and monopolistic markets become very difficult to assess. Moreover, the best market type (from an efficiency viewpoint) may not be perfectly competitive nor pure monopolistic, but rather some intermediate form, such as oligopoly.