Durable Goods, Market Structure and the Incentives to Innovate

A commonly-cited finding in the innovation literature is that a monopoly tends to innovate too little. This paper demonstrates that a monopoly may devote more resources to innovation than is socially optimal if it produces a durable good. This possibility occurs because durability creates new innovation incentives. Once an initial stock of a durable good has been produced, the monopoly faces a residual demand for the good. Innovation may allow the monopoly to more profitably exploit this residual demand, and this ability may lead the monopoly to devote more resources to innovation than is socially optimal.