wangyi
Jan 22, 2017
Dissertations / Which market structure is the most favorable to innovation in the Internet economy? [NEW]
This paper investigates which market structural has beneficial impact on the innovation in the Internet economy and examines the following research questions.
(1)What the relationship between innovation and competition? (2) How the Internet economy developed and (3) whether the benefit to innovate in monopoly market is obviously different from the competitive market , and if so, how is it different?
The current paper has analyzed innovation mostly from Schumpeter's theories and Arrow's point, focusing on study competition generated monopoly market structure and the advantage of innovation in competitive monopoly rather than in competition structure, and drew conclusions from the different exist enterprise cases. More specifically, I investigated the determining factors of innovative and how they are related to the market structure.
According to relevant literature and the Internet industry cases, observing competition in Internet market generated enterprise monopoly. The enterprise had to develop many innovation to keep the monopoly position, because innovation need abundant funds and strong human resources, it easy to be satisfied by monopolist due to monopoly has market power to control the price. By contrast, the enterprises in competition market are not had market power thus their products' price are closed to marginal cost that led them cannot invest enough funds in innovation.
During the production of this dissertation, I was fortunate to have received a lot of help. First of all, I would like to express my sincere gratitude to my supervisor Julien Pénin, for his instructive advice and useful guidance on my study. I am deeply grateful of his help in the completion of this thesis.
Second, I wish to extent my appreciation to KarynaMed, whose profound knowledge of English provide great help for me and triggers my enthusiasm for accomplishing this thesis.
Finally, I want to express my gratitude to my beloved parents who have always been encouraging, supporting and caring for me all of my life.
Internet economy is emerging as the new industry that with the convenience and openness of its transaction playing more and more important role in the economy. It is not only an advanced form of economy based on traditional economy, but also a sign of new era. Recent research has thoroughly examined the relationship between the Internet economy with market structure and innovation in network. While this line of research has generated a better understanding of what market structure favorable to Internet economy, it has barely touched upon the interaction between innovation and market structure.
In the development of traditional economy, two famous economists Joseph Schumpeter[ Schumpeter (1883-1950) is an Austrian native, he moved from Austrian to England to Egypt to Germany before coming to teach at Harvard during the 1930s and 1940s. Schumpeter is one of the most famous economists of the last century for describing capitalism as developing though gales of "creative destruction," by which new technologies supplant the old. Schumpeter also is well known for suggesting that large firms and monopolists may be more innovative than firms in competitive market.] and Kenneth Arrow[ Arrow, another influential 20th century economist, a Nobel Prize-winning economist who has taught at Stanford and Harvard, explained in 1962 that a monopolist might innovate less than competitive firms because a monopolist has less to gain.
] had argument the effect of competition on innovation incentive in different market structure, and many scholars had analyzed their theories. In 2001, Richard Schmalensee published Antitrust Issues in Schumpeterian Industries, then in 2003 Tom Nicholas analyzed the reason why Schumpeter's theory were widely accepted in 1920s America and Richard Gilbert(2006) also did some researches. In 2007 Jonathan Baker put forward his opinion "Today's antitrust institutions support innovation by targeting types of industries and practices where antitrust enforcement would enhance R&D incentives the most". In 2011 Carl Shapiro argued that Arrow and Schumpeter perspectives did not conflict. Nowadays, people accept that competition market structure is better for innovation but Internet economy seems like place in a monopoly situation.
Whether or not the natural monopoly make the technical innovate ability in a inferior position? I study this question by reference to a collective way of seeing for various literature and web sites, the material will be referred to later. The body paragraphs be separated into three sections by investigate the link between competition and innovation, the network externality and other feature of Internet economy, and dialectical the funding and market power are the crucial beneficial factors to innovate. Therefore, drawing the conclusion that competitive monopoly structure is most favorable to innovation in Internet economy.
i. The market structure and motivate of innovation
Nowadays, the competitiveness of enterprises is the competition of Core Competency. The core capability of an enterprise includes strategy, culture, marketing and technology and so on. One of the most important competitiveness is the technical competency advantage. In order to survive and develop in the fierce market competition, an enterprise must have its specific and difficult technology to imitate. In the core competence of technology, a very important aspect is the ability and the incentive of innovation.
As far as we know that there are many market structures. According to the number of manufacturers from more to less, we have four different types of competitive markets: perfect competition market, monopolistic competition market, oligopoly market and monopoly market. Simply stated, perfect competition market is a kind of market structure without any obstruction and interference. In addition, actors on the market are price-takers. Many agricultural markets have the characteristics of a perfect competitive market. Monopolistic competition market have as many producers as consumers in the market, and have only few barriers to entry and exit. But no business has total control over the market price. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal,
clothing, shoes, and service industries in large cities. An oligopoly is a market with a limited number of firms, oligopolies arise due to entry barriers. Different anticipations of the competitors' reaction lead to Cournot duopoly, Stackelberg duopoly and Bertrand competition. Monopoly is defined as a situation where a firm is the only one to sell a product which has no close substitute. The monopolist has certain market power, compering with perfect competition market monopolist is a price-maker. Based on these four types of market, what market structure can promote innovation and what is the link between competition and innovation?
Economists believed that perfect competition market was the best beneficial model for innovation, whereas the monopoly was associated with the low efficiency of resource allocation. The monopoly enables enterprises to reduce production and increase product prices, so that monopolists do not make innovation and have less incentives to improve technological progress. Hence, the classical economists and neoclassical economists widely believe that economic development is a successive and progressive development process. Economic development can also be considered as a static theory that documents the state of an economy for a certain time. According to Schumpeter and Backhaus (2003), the changes in this equilibrium state to document in economic theory can only be caused by intervening factors coming from the outside.
However, Joseph Schumpeter puts forward a proposal for the free competition market structure. The argument for skepticism has its roots in the Theory of Economic Development( published in 1911) Schumpeter viewed small entrepreneurial ventures as seedbeds of technological discovery, but three decades later in Capitalism, Socialism and Democracy (published in 1942) he implies that perfect competition is unlikely possible in the real life even the agricultural one is not the perfect competition market. He supposes that the idea of perfect competition has evolved from an analytical tool of theoretical economics into a catastrophic ideal that should guide public policy.[ If we try to visualize how perfect competition works or would work in the process of creative destruction, we arrive at a still more discouraging result.In the last resort, [cases approaching perfect competition, such as] American agriculture, English coal mining, [and] the English textile industry are costing consumers much more and are affecting total output much more injuriously than they would if being controlled, each of them, by a dozen good brains.] He advanced the well known nowadays hypothesis that large firms with market power would accelerate the rate of innovation. First of all, the technological innovation is not only a high investment but also a high risk process, it is only possible for large monopoly enterprises which have an ability to bear the risk of technological innovation and investment. On the other hand, technological innovation is a basic element of competition, the development of large manufacturers can not eliminate the competition, but because of the pursuit of profit can strength the competition. The other reason is that, under the 'prefect competition', due to small manufacturers' weakly strength, they cannot afford the extensive cost of R&D projects and, therefore, it's hard to achieve technological innovation. He emphasized that big firms under oligopoly market in effect contributed to innovation rather than small firms in perfect competition market, and argued not to advocate perfect competition as a model of ideal efficiency.
Schumpeter's theories cannot be accepted entirely, even economists accept his argument about the relationship between innovation and competition, the point of monopoly stimulate innovation has always been a controversial debate. Kenneth Arrow was the first to put forward a logical arguing of the issue. In his article 'Economic Welfare and the Allocation of Resources for Invention' of 1962 he points to the opposite conclusion that Schumpeter does."The incentive to invent," wrote Arrow, "is less under monopolistic than under competitive conditions." Arrow showed, monopolists would have a lower incentive to innovate comparing with a competitive firm, because the monopolists have less beneficial to be obtained from innovating.[ the monopolist with lower costs will merely replace itself, while the competitive firm will (by assumption) take over the market, in which it previously earned no economic profits. Tirole (1997, 392), dubbed this the "replacement effect."] For the monopolists' perspective, they prefer to maximize profit by raising price and reducing output. In consequence, a monopolist would have fewer amount of output over which to spread the fixed cost of the new technology. The cost of innovation for a firm under competition market means that there would be many products to produce and the average cost could be spread thinly, but on the contrary, a monopolist with lower output is unnecessary for investments in the innovation. There are also some other reasons for enterprises to make innovation, so Arrow concluded "The preinvention monopoly power acts as a strong disincentive to further innovation".
Nowadays, I'm not against any party. In my perspective, I agree with Carl Shapiro's[ Competition and Innovation Did Arrow Hit the Bull's Eye?Carl Shapiro] opinion which contains Arrow and Schumpeter perspectives that are fully compatible and mutually reinforcing. Both of the effects fit well with the Contestability principle[The Arrow effect fits well with the Contestability principle: for a given level of ex post sales, a firm with few ex ante sales has more to gain from innovation. Put differently, a firm making substantial sales even if it does not innovate (such as
Arrow's incumbent monopolist, that faces no threat) muted incentives to innovate.
The Schumpeter effect also fits well with the Contestability principle:companies making major innovations often are rewarded with large market shares, leading to high ex post market concentration. Conversely, a small firm that will not be able to grow much, even if it successfully innovates, has lower incentives to invest in R&D than a larger firm.].
However, when human beings enter into the era of network economy, which is based on knowledge and information, the traditional economic theory have been challenged. With the coming of the internet age and the globalization of information, these changes do not only affect public thoughts and lifestyles, but also impact the production and operation of enterprises. As far as we know that because of the development of modern information technology, the ability of information processing and the efficiency of information use had a significant improvement and as the same time, accelerated the pace of scientific and technological development and innovation. The emergence and development of global information network to further accelerate the transmission of information in the global scope, so that the development of the world economy presents the tendency of globalization obviously and establish the global network economy with modern information technology as its core. We regard the internet economy based on computer networks (especially internet technology) as a new form of economy.
When the digital products and information products were first introduced, the price used to be very high, but with the maturity of information technology the marginal cost of production became much lower than the initial cost, or even close to zero. For example, software products, internet services, etc. In the era of industrial economy, economies of scale make it possible for any enterprise to have an optimal range of production[ Below the scope of production activities cannot reach the minimum average cost, while being higher than the range of production activities the average cost has risen.]. Nevertheless, in the era of internet economy, although the marginal cost is very small, the fixed cost is high, laying the cost advantage of incumbent(average cost are lower for incumbents). This advantage form structural barriers that make impregnable such as learning effect and lock-in effect. Learning effect is a process by which manufacturer's production experience and successive accumulation of output increase, and results in the cost per units of output constantly decrease, from LAC 1 to LAC 2. Figure 1 to illustrate the learning effect. Learning effect may introduce an asymmetry between incumbents and entrants, it is implies that AC are decreasing with past level of production. If monopoly price is just below minimal ACEntrant entry is blocked. Also, network economy has another important characteristic-- Non-competition. That is, when a customer consumes a product, other customers obtain benefits from the product is not affected.
i. Network Externality
In 1950, Leibenstein first raised the concept of network externality, then Rohlfs(1974) conducted the earliest analysis of the ' equilibrium user set '. In 1985, Katz and Shapiro analyzed the market structure and compatibility decision under the network externality. They said the value of membership to one user is positively affected when another user joins and enlarges the network, such markets are said to exhibit "network effects," or "network externalities." Bental and Spiegel[ Bental, B., Spiegel, M., 1995. Network Competition, Product Quality, and Market Coverage in the Presence of Network Externalities. The Journal of Industrial Economics 43, 197-208.] discussed the influence of network externality on product quality improvement.
Network externality plays an important role in the Internet economy. It reinforces the customers' brand loyalty and consumer inertia. These three factors make up the lock-in structural barriers[ The consequence is a switching cost when changing the product/technology, which may give a cost advantage to existing firms. This leads to a first mover advantage for pioneers.], meanwhile, the product differentiation effect can be reduced. According to available literature, network effects could be classified into two kinds:
Direct network effects: An increase in usage leads to a direct increase in value for other users. For example, the more the number of Facebook users, each Facebook users from the internet products to get more benefits. Because network products have three characteristics: First is no matter how the network extension and increase the number of Facebook users, it ultimately expand the size of the network scale, so the Facebook user group will be increased due to the scale of nodes to benefit. Secondly, the information in the network is mutual, therefore, with the Facebook users growth, the user connections increase exponentially. That is, each additional user could establish a relationship with other users. (Figure 2)The larger the user base, the greater the number of such relationships, resulting in each user to get the total number of information and communication will be more convenient. The last characteristic is that the establishment of the network has the characteristics of large investment, long investment period, strong monopoly and long product life cycle. This shows that the increase of users can share the huge investment cost of Facebook technology development, expansion influence and facility construction, but also because the long investment cycle and use period, Facebook with a monopoly feature without fear of the competitors to divide up profits, it in the long-term operation can slowly accumulate a large number of users, access to huge profits.
Indirect network effects: Increases in usage of one product or network spawn increases in the value of a complementary product or network, which can in turn increase the value of the original. Examples of complementary goods include software (such as an Office suite for operating systems) and DVDs (for DVD players). This is why Windows and Linux might compete not just for users, but for software developers. This is more accurately called a cross-side network effect in order to distinguish network benefits that cross distinct markets. Continuing with the Facebook example, as an information communication platform, the users pay their attention and the merchants pay their advertising fee. Through the above analysis of direct network externalities, the utility of Facebook increase with the number of users, and that promotes new users joining. Moreover, each additional unit user of Facebook represents the advertisement coverage increasing a corresponding unit. If a user shares
an advertisement, the followers have the opportunity to see it as well as the spread of the advertising effect will be improved. The better the advertising effect, the more merchants pay for advertising, and Facebook operators obtain profits from it. Therefore, Facebook is a trading platform using indirect network externalities between users and merchants, it can explained by the two-sided markets.
ii. Two-sided markets
The two-sided market is similar to the principle of indirect network externality. It is a trading platform that gather the two parties with indirect network externalities characteristic, pricing different for each side and the price can effect the entire platform demand and transaction volume. Many mass media are two-sided markets. The two parties have indirect network externalities are customers and merchants, respectively.
Under the Internet economy the traditional one-sided market has turned to two-sided market even multi-sided market, and has a huge difference from one-sided market. At present, scholars to study the two-sided market from a different point of view to make a different interpretation. The definition of the mainstream mainly divided into two categories: Rochet and Tirole (2003)[ Jean-Charles Rochet, Jean Tirole (2003), Platform Competition in Two-Sided Markets], they from the "price structure non-neutrality" perspective defined the two-sided market as "a market has bilateral structure with the price level unchanged, the price structure changes will affect the platform trading volume." Armstrong (2006)[ Armstrong, M. (2006). Competition in two-sided markets. RAND Journal of Economics] from the "Cross-group Externalities" perspective defined it as " markets where users' net utility increases as the number of users on the other side increases." It is easy to see that the two-sided market need to meet the following conditions: both side of the platform have two or more groups of different users; there is the characteristic of network cross externalities, while the externalities can not be completely internalized, and both users get benefit because of the existence of other users; The existence of one or more Internet companies will internalize these external interests while obtain profit by providing a trading platform.
According to the above logic can also introduce the definition of the multi-sided market, that is, enterprises are faced with more than two different consumer groups, and there is a strong interaction between each other. Compared with one-sided market, two-sided market( or multi-sided market) has distinct characteristics:
1)Cross-group Externalities
The value of the product or service increases as the number of users increases, and it is the economies of scale from the same class of users. Two-sided market externalities depend not only on the number of users on the same side of the platform, but also on the number of users on the other side of the platform, which is a cross-network externality.
2)Asymmetry of Market Pricing
Based on the above understanding of the two-sided market, on a bilateral or multilateral market in order to maintain the balance of user demands, merchants must use asymmetric pricing, so as to attract more users to participate in the platform make more transactions and thereby achieve the purpose of strengthening the scale of enterprises.
Under bilateral or multilateral market enterprises are facing more complex competition than the one-sided market, because of the characteristics of two-sided (or multi-sided) markets, every side user has a strong interaction with others thus any change in the market will affect the other side of the market changes. Therefore, in the two-sided or multi-sided market, we must give more consideration to the competitive factors enterprises are facing.
In the Internet economy, the competition in states but also in organizations are more reflected in the core technical competition, and with the accelerate speed of technology change, the product life cycle gradually shortened, technological innovation has become the key competency to victory in the fierce competition.
In 1999, the Alibaba Group established is facing the majority competition of SMEs in China. Starting from the B2B commerce, later extended to Taobao in the individual, it enable to build up the bridge between the two platforms. In order to promote the transaction, it has launched online payment (Alipay), instant messaging software (Ali Want), and an advertising supermarket platform (Alibaba website). Alibaba is fcous on the e-commerce, through the develop of new technology and new models gain users. The successful of Alibaba, especially in the B2B aspect is completely because of its independent innovation. Generally, the information products requirements for product standardization can only tolerate the existence of one technology, which is more conducive to incumbents or the possessor of strong technical superiority, but also increases the difficulty of the other competitor entry, thereby contributing to the monopoly trend. Whereas, due to the high extent openness of the Internet market, entry and exit are barrier freely. Therefore, as long as the new products have technical advantages and can be accepted by the market, other technologies and products can be eliminated , the possessor of strong technical superiority will occupy the entire market. This objectively lead to the phenomenon that stronger competition is more conducive to the formation of monopolies, and to further strengthen and consolidate the monopoly structure of the market.
From this, we see the monopoly in Internet economy is contrary to "monopoly eliminate competition". In the Internet economy the enterprises obtain monopoly power is the result of competition in the survival of the fittest, will also usher the constant challenge from new competitors to compete at a higher level of technology.
In Arrow's (1962) opinion "The preinvention monopoly power acts as a strong disincentive to further innovation". That based on two reasons: 1) monopoly enterprises lack the incentive to innovate. 2) the other enterprises' technology may be suppressed by monopolists. But from the monopoly enterprises(Facebook、Amazon、Netflix、Google) under the Internet economy, at least it is hard to find a monopolist lack the incentive to innovate.
In the network economy, especially in the information industry, the formation of monopoly is not from by monopoly, but mainly based on technology competition major in technological innovation. Therefore, this paper will called the emergence of monopoly in the Internet economy as a 'competitive monopoly' to distinguish it from traditional monopoly, and monopoly competition. However, the enterprises want to occupy any position and a maintain monopoly in Internet economy, must continue to improve their competitiveness, then the most effective ways is technical innovation. According to Burning Glass Technologies Labor Insights( Figure 3), US businesses posted job notices for approximately 807,450 core information technology( IT) jobs during Q4 of 2015, an increase of 39% over Q4 2014. The total core IT occupation workforce increased by an estimated 151,200 jobs in 2015. This explains a portion of the job posting data. Companies may be expanding or moving into new areas and need to employ more workers, the demand of developers is the highest one, thus we can draw a conclusion that innovation in Internet industry is very important.
In general, the higher the frequency of technological innovation, the easier it is to focus on a small number of enterprises and even individual enterprises. The more likely it is to form oligopolies and monopolies, enterprises will occupy the position of monopoly in long-term. On the contrary, the more the technological innovation scattered, the faster the frequency of a monopoly position of enterprises to replace. The increasingly fierce technological innovation combines competition and monopoly, and promotes the formation of competitive monopoly structure.
In the traditional industrial economy, the transaction price on the market can easy reflect the relationship between supply and demand, and thus through changes in the price and quantity can be a good expression of supply and demand balance of the market. But in the network economy, information and knowledge become a major factors in the era of knowledge expansion, particularly on the Internet, the higher the product sales, means that the greater the product network. The price changes are meaning based on customers' evaluation of information products value and sensitivity to prices, which lead to once the customers acceptance, the merchant will pricing in a very higher level, even exceed the original cost of production more than ten times. The higher the value of the product, the more consumers have an incentive to buy the product. To implement the network externalities, as soon as possible to achieve the critical capacity, manufacturers have sufficient motivation to improve product network rather than reduce production. Certainly, due to the marginal cost of the product is very low, companies can undersell even dumping it. The input factors change in the network economy make the merchants' market power increase significantly, that is enhance the monopoly power.
On the other hand, because consumers are highly sensitive to product prices, their evaluation and selection enhance the degree of competition between markets. Therefore, the sense of monopoly under the network economy and the traditional monopoly market is different, this is because the degree of control the price is primarily depends on the demand side, that is, customers valuation the degree of information products. This kind of competition creates market forces that make it impossible to price a product once it is divorced from a specific customer, which is the meaning of "competition" in such structure of the market.
From the above analysis, we can easily see that knowledge and information as the basis elements of the competitive monopoly market structure formation, the increasingly fierce technological innovation activities between enterprises is the conditions of competitive monopoly formation, technical incompatibility is the guarantee of competitive monopoly formation.
Competitive monopoly market is evolved from the traditional market structure, it have similar characteristics with the traditional market structure (especially the imperfect competition market), but also showing different extent of variation. Competitive monopoly structure has the following characteristics compared with the oligopoly and monopoly competition structure, as shown in the below Table.
A Comparison of the Characteristics of Competitive Monopoly Market Structure
Characteristics Oligopoly Monopoly competitionCompetitive monopoly
FirmLittle Much Little
Product differenceLittle Big Huge
competitionStronger Strong Strongest
Entry&exit barrierBig Little Few
Price setter Enterprise Enterprise Consumer
Core competitivenessInnovation Brand Multi-factor
Social welfare effectNegative Negative Positive
Here are some of the main features of competitive monopoly structure describe:
1)The number of firms in the market are less but concentrated. In the competitive monopoly market, there are always one or several technical leaders occupy a major share of the market. In this market, the monopoly of the situation has been formed. However, the uncertainty of who occupies the oligopoly and the monopoly position is very high. The high degree of competition, especially the technological innovation, may lead to the replacement of the position at any moment. That is, the replacement rate of the monopoly position is very high.
2)Competition and Monopoly Strengthened the antinomy[ Refers to a real or apparent mutual incompatibility of two laws. It is a term used in logic and epistemology, particularly in the philosophy of Kant and Roberto Unger.]. Under the Internet economy, the degree of competition and monopoly in the monopoly structure have been strengthened. On the one hand, due to the characteristic of technical incompatibility and standardization of network, once the enterprise through technological innovation obtain the monopoly position, the above features will strengthen the monopoly of enterprises with a "winner take-all" situation, which lead to the monopoly of the market continues to increase; On the other hand, the degree of competition in the market are more intense. In the Internet economy, monopoly structure industry threshold to entry is very low, enterprises are free to enter and exit. In order to obtain more profits from the market, new entrants or potential competitors will try to replace the existing monopolized enterprises by technological innovation, product innovation and other means. In order to maintain its monopoly position, enterprise can not stop the pace of innovation, otherwise it will be eliminated. Therefore, the Internet economy under the monopoly situation is completely different from the traditional economy under the monopoly. The traditional monopoly structure means less degree competition and less competitors. In the Internet economy, not only the monopoly structure has been strengthened, but also the degree of competition is more intense, which in the traditional economy can not be achieved antinomy in the new economy has been fully reflected.
3) The total social welfare increases. Monopolistic structure in the traditional economy will lead to a decrease in both consumer surplus and total surplus. This is because the monopoly firm's pricing is much higher than the price at the time of competition, and the increase of the price leads to the decrease of the purchase quantity. Resulting in the loss of consumer welfare and social welfare. then, whether or not the monopoly structure of the Internet economy will bring the above losses? the answer is negative. Due to the network externality, the huge market share makes the gains of each network member increase remarkably, at the same time, it brings great network benefit to the enterprise, thus increasing the consumer surplus and producer surplus, the total social welfare can be increased. In Economides Flyer's model, the greater the number of firms in the market, the worse the social welfare situation. Therefore, monopoly is beneficial to the distribution of resource and improve the social welfare, which means the market is closer to Pareto Optimality.
i. Funding
In the competitive monopoly market structure, enterprises often have a strong monopoly position and market power. With the advantages of monopoly, the enterprises usually have abundant funds and strong human resources. Competitive monopoly enterprises attach great importance to R&D, they will increase the intensity of investment in R&D. What's more, because of its abundant funds, they completely have the ability to bear the risk of innovation. As the role of technological innovation in building the core competitiveness of enterprises is becoming increasingly prominent, and the competitive degree of competitive monopoly market structure is increasing, enterprises in this market will introduce and develop a large number of R&D developer with advanced technology and innovative ability. In nowadays, the typical network industry (such as telecommunications, the Internet, etc.) has proportion of R&D staff exceed 50%, and some even reached two-thirds. The the enterprises have a strong ability to invest in innovation, it means with the monopoly extent of the market structure increased, resources have increased, the ability to invest in innovation has gradually increased.
However, to the enterprise under competition market structure the fierce price competition cannot make them get enough profit to invest in innovation. That is unfavorable to innovation in the Internet economy. Hence, the monopoly will better than competitive market structure, and the degree of monopoly in the market promote the ability of enterprises to invest in innovation.
ii. Market power
Enterprises in competitive monopoly structure can gain more market information, demand and feedback by preponderance of their monopoly position, and carry out in-depth sorting and processing the data, and finally form new technological innovation direction. Especially in the Internet economy, the Internet has become the main media for people to communicate without the restraint of time and space, and has low cost, companies can get more consumer demands and information through this media; Competitive monopoly structure enterprises will use its market share and marketing channels to constantly exploit new markets, increase product sales. At the same time, monopolistic characteristics make it easier to gain recognition in market development period. Competitive monopoly enterprises also have great advantages in selling profit. As the company's products have more people recognized, the network value of the product increases, companies have the space of raise price, and with the marginal cost of the product is almost zero, the company received higher sales margins. In turn, the company invest sales revenue into the next stage of technological innovation activities to earn more profits, and so on in a virtuous circle.
We can see that the competitive monopoly structure enterprise through the market research, market development and the positive impact of sales profits to gain the market power control the price and enhance the ability of enterprises to achieve technological innovation.
In short, the competitive monopoly market structure enables enterprises to have a monopoly power, not only to promote the technological innovation capability of itself, while fierce competition has enhanced the enthusiasm of enterprise technological innovation and improve the motivation of enterprise innovation.
Ⅴ. Conclusion
Technological innovation capability is play a crucial role in Internet market. In this industry once the enterprise acquire the advance technological innovation capability which means gain the monopoly position and high market power. However, innovation need abundant funds and strong human resources, the enterprises in competition market are not had market power which could control the price in market thus their products' price are closer to marginal cost that lead them cannot have enough profit to invest fundings in innovation. Therefore, the competitive monopoly structure is favorable to innovation.
Despite all this, the report is left much to be desired. Because of the time to review and research material are not enough, the empirical researches are not deep, and the academic support not sufficient.
Abstract
This paper investigates which market structural has beneficial impact on the innovation in the Internet economy and examines the following research questions.
(1)What the relationship between innovation and competition? (2) How the Internet economy developed and (3) whether the benefit to innovate in monopoly market is obviously different from the competitive market , and if so, how is it different?
The current paper has analyzed innovation mostly from Schumpeter's theories and Arrow's point, focusing on study competition generated monopoly market structure and the advantage of innovation in competitive monopoly rather than in competition structure, and drew conclusions from the different exist enterprise cases. More specifically, I investigated the determining factors of innovative and how they are related to the market structure.
According to relevant literature and the Internet industry cases, observing competition in Internet market generated enterprise monopoly. The enterprise had to develop many innovation to keep the monopoly position, because innovation need abundant funds and strong human resources, it easy to be satisfied by monopolist due to monopoly has market power to control the price. By contrast, the enterprises in competition market are not had market power thus their products' price are closed to marginal cost that led them cannot invest enough funds in innovation.
Acknowledgments
During the production of this dissertation, I was fortunate to have received a lot of help. First of all, I would like to express my sincere gratitude to my supervisor Julien Pénin, for his instructive advice and useful guidance on my study. I am deeply grateful of his help in the completion of this thesis.
Second, I wish to extent my appreciation to KarynaMed, whose profound knowledge of English provide great help for me and triggers my enthusiasm for accomplishing this thesis.
Finally, I want to express my gratitude to my beloved parents who have always been encouraging, supporting and caring for me all of my life.
Ⅰ.Introduction
Internet economy is emerging as the new industry that with the convenience and openness of its transaction playing more and more important role in the economy. It is not only an advanced form of economy based on traditional economy, but also a sign of new era. Recent research has thoroughly examined the relationship between the Internet economy with market structure and innovation in network. While this line of research has generated a better understanding of what market structure favorable to Internet economy, it has barely touched upon the interaction between innovation and market structure.
In the development of traditional economy, two famous economists Joseph Schumpeter[ Schumpeter (1883-1950) is an Austrian native, he moved from Austrian to England to Egypt to Germany before coming to teach at Harvard during the 1930s and 1940s. Schumpeter is one of the most famous economists of the last century for describing capitalism as developing though gales of "creative destruction," by which new technologies supplant the old. Schumpeter also is well known for suggesting that large firms and monopolists may be more innovative than firms in competitive market.] and Kenneth Arrow[ Arrow, another influential 20th century economist, a Nobel Prize-winning economist who has taught at Stanford and Harvard, explained in 1962 that a monopolist might innovate less than competitive firms because a monopolist has less to gain.
] had argument the effect of competition on innovation incentive in different market structure, and many scholars had analyzed their theories. In 2001, Richard Schmalensee published Antitrust Issues in Schumpeterian Industries, then in 2003 Tom Nicholas analyzed the reason why Schumpeter's theory were widely accepted in 1920s America and Richard Gilbert(2006) also did some researches. In 2007 Jonathan Baker put forward his opinion "Today's antitrust institutions support innovation by targeting types of industries and practices where antitrust enforcement would enhance R&D incentives the most". In 2011 Carl Shapiro argued that Arrow and Schumpeter perspectives did not conflict. Nowadays, people accept that competition market structure is better for innovation but Internet economy seems like place in a monopoly situation.
Whether or not the natural monopoly make the technical innovate ability in a inferior position? I study this question by reference to a collective way of seeing for various literature and web sites, the material will be referred to later. The body paragraphs be separated into three sections by investigate the link between competition and innovation, the network externality and other feature of Internet economy, and dialectical the funding and market power are the crucial beneficial factors to innovate. Therefore, drawing the conclusion that competitive monopoly structure is most favorable to innovation in Internet economy.
Ⅱ. The Link Between Competition and Innovation
i. The market structure and motivate of innovation
Nowadays, the competitiveness of enterprises is the competition of Core Competency. The core capability of an enterprise includes strategy, culture, marketing and technology and so on. One of the most important competitiveness is the technical competency advantage. In order to survive and develop in the fierce market competition, an enterprise must have its specific and difficult technology to imitate. In the core competence of technology, a very important aspect is the ability and the incentive of innovation.
As far as we know that there are many market structures. According to the number of manufacturers from more to less, we have four different types of competitive markets: perfect competition market, monopolistic competition market, oligopoly market and monopoly market. Simply stated, perfect competition market is a kind of market structure without any obstruction and interference. In addition, actors on the market are price-takers. Many agricultural markets have the characteristics of a perfect competitive market. Monopolistic competition market have as many producers as consumers in the market, and have only few barriers to entry and exit. But no business has total control over the market price. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal,
clothing, shoes, and service industries in large cities. An oligopoly is a market with a limited number of firms, oligopolies arise due to entry barriers. Different anticipations of the competitors' reaction lead to Cournot duopoly, Stackelberg duopoly and Bertrand competition. Monopoly is defined as a situation where a firm is the only one to sell a product which has no close substitute. The monopolist has certain market power, compering with perfect competition market monopolist is a price-maker. Based on these four types of market, what market structure can promote innovation and what is the link between competition and innovation?
Economists believed that perfect competition market was the best beneficial model for innovation, whereas the monopoly was associated with the low efficiency of resource allocation. The monopoly enables enterprises to reduce production and increase product prices, so that monopolists do not make innovation and have less incentives to improve technological progress. Hence, the classical economists and neoclassical economists widely believe that economic development is a successive and progressive development process. Economic development can also be considered as a static theory that documents the state of an economy for a certain time. According to Schumpeter and Backhaus (2003), the changes in this equilibrium state to document in economic theory can only be caused by intervening factors coming from the outside.
ii. Schumpeter's theory of monopoly and innovation
However, Joseph Schumpeter puts forward a proposal for the free competition market structure. The argument for skepticism has its roots in the Theory of Economic Development( published in 1911) Schumpeter viewed small entrepreneurial ventures as seedbeds of technological discovery, but three decades later in Capitalism, Socialism and Democracy (published in 1942) he implies that perfect competition is unlikely possible in the real life even the agricultural one is not the perfect competition market. He supposes that the idea of perfect competition has evolved from an analytical tool of theoretical economics into a catastrophic ideal that should guide public policy.[ If we try to visualize how perfect competition works or would work in the process of creative destruction, we arrive at a still more discouraging result.In the last resort, [cases approaching perfect competition, such as] American agriculture, English coal mining, [and] the English textile industry are costing consumers much more and are affecting total output much more injuriously than they would if being controlled, each of them, by a dozen good brains.] He advanced the well known nowadays hypothesis that large firms with market power would accelerate the rate of innovation. First of all, the technological innovation is not only a high investment but also a high risk process, it is only possible for large monopoly enterprises which have an ability to bear the risk of technological innovation and investment. On the other hand, technological innovation is a basic element of competition, the development of large manufacturers can not eliminate the competition, but because of the pursuit of profit can strength the competition. The other reason is that, under the 'prefect competition', due to small manufacturers' weakly strength, they cannot afford the extensive cost of R&D projects and, therefore, it's hard to achieve technological innovation. He emphasized that big firms under oligopoly market in effect contributed to innovation rather than small firms in perfect competition market, and argued not to advocate perfect competition as a model of ideal efficiency.
iii. Competition incentive innovation in Arrow's perspective
Schumpeter's theories cannot be accepted entirely, even economists accept his argument about the relationship between innovation and competition, the point of monopoly stimulate innovation has always been a controversial debate. Kenneth Arrow was the first to put forward a logical arguing of the issue. In his article 'Economic Welfare and the Allocation of Resources for Invention' of 1962 he points to the opposite conclusion that Schumpeter does."The incentive to invent," wrote Arrow, "is less under monopolistic than under competitive conditions." Arrow showed, monopolists would have a lower incentive to innovate comparing with a competitive firm, because the monopolists have less beneficial to be obtained from innovating.[ the monopolist with lower costs will merely replace itself, while the competitive firm will (by assumption) take over the market, in which it previously earned no economic profits. Tirole (1997, 392), dubbed this the "replacement effect."] For the monopolists' perspective, they prefer to maximize profit by raising price and reducing output. In consequence, a monopolist would have fewer amount of output over which to spread the fixed cost of the new technology. The cost of innovation for a firm under competition market means that there would be many products to produce and the average cost could be spread thinly, but on the contrary, a monopolist with lower output is unnecessary for investments in the innovation. There are also some other reasons for enterprises to make innovation, so Arrow concluded "The preinvention monopoly power acts as a strong disincentive to further innovation".
iv. Internet economy
Nowadays, I'm not against any party. In my perspective, I agree with Carl Shapiro's[ Competition and Innovation Did Arrow Hit the Bull's Eye?Carl Shapiro] opinion which contains Arrow and Schumpeter perspectives that are fully compatible and mutually reinforcing. Both of the effects fit well with the Contestability principle[The Arrow effect fits well with the Contestability principle: for a given level of ex post sales, a firm with few ex ante sales has more to gain from innovation. Put differently, a firm making substantial sales even if it does not innovate (such as
Arrow's incumbent monopolist, that faces no threat) muted incentives to innovate.
The Schumpeter effect also fits well with the Contestability principle:companies making major innovations often are rewarded with large market shares, leading to high ex post market concentration. Conversely, a small firm that will not be able to grow much, even if it successfully innovates, has lower incentives to invest in R&D than a larger firm.].
However, when human beings enter into the era of network economy, which is based on knowledge and information, the traditional economic theory have been challenged. With the coming of the internet age and the globalization of information, these changes do not only affect public thoughts and lifestyles, but also impact the production and operation of enterprises. As far as we know that because of the development of modern information technology, the ability of information processing and the efficiency of information use had a significant improvement and as the same time, accelerated the pace of scientific and technological development and innovation. The emergence and development of global information network to further accelerate the transmission of information in the global scope, so that the development of the world economy presents the tendency of globalization obviously and establish the global network economy with modern information technology as its core. We regard the internet economy based on computer networks (especially internet technology) as a new form of economy.
When the digital products and information products were first introduced, the price used to be very high, but with the maturity of information technology the marginal cost of production became much lower than the initial cost, or even close to zero. For example, software products, internet services, etc. In the era of industrial economy, economies of scale make it possible for any enterprise to have an optimal range of production[ Below the scope of production activities cannot reach the minimum average cost, while being higher than the range of production activities the average cost has risen.]. Nevertheless, in the era of internet economy, although the marginal cost is very small, the fixed cost is high, laying the cost advantage of incumbent(average cost are lower for incumbents). This advantage form structural barriers that make impregnable such as learning effect and lock-in effect. Learning effect is a process by which manufacturer's production experience and successive accumulation of output increase, and results in the cost per units of output constantly decrease, from LAC 1 to LAC 2. Figure 1 to illustrate the learning effect. Learning effect may introduce an asymmetry between incumbents and entrants, it is implies that AC are decreasing with past level of production. If monopoly price is just below minimal ACEntrant entry is blocked. Also, network economy has another important characteristic-- Non-competition. That is, when a customer consumes a product, other customers obtain benefits from the product is not affected.
Ⅲ. Feature of Internet Economy
i. Network Externality
In 1950, Leibenstein first raised the concept of network externality, then Rohlfs(1974) conducted the earliest analysis of the ' equilibrium user set '. In 1985, Katz and Shapiro analyzed the market structure and compatibility decision under the network externality. They said the value of membership to one user is positively affected when another user joins and enlarges the network, such markets are said to exhibit "network effects," or "network externalities." Bental and Spiegel[ Bental, B., Spiegel, M., 1995. Network Competition, Product Quality, and Market Coverage in the Presence of Network Externalities. The Journal of Industrial Economics 43, 197-208.] discussed the influence of network externality on product quality improvement.
Network externality plays an important role in the Internet economy. It reinforces the customers' brand loyalty and consumer inertia. These three factors make up the lock-in structural barriers[ The consequence is a switching cost when changing the product/technology, which may give a cost advantage to existing firms. This leads to a first mover advantage for pioneers.], meanwhile, the product differentiation effect can be reduced. According to available literature, network effects could be classified into two kinds:
Direct network effects: An increase in usage leads to a direct increase in value for other users. For example, the more the number of Facebook users, each Facebook users from the internet products to get more benefits. Because network products have three characteristics: First is no matter how the network extension and increase the number of Facebook users, it ultimately expand the size of the network scale, so the Facebook user group will be increased due to the scale of nodes to benefit. Secondly, the information in the network is mutual, therefore, with the Facebook users growth, the user connections increase exponentially. That is, each additional user could establish a relationship with other users. (Figure 2)The larger the user base, the greater the number of such relationships, resulting in each user to get the total number of information and communication will be more convenient. The last characteristic is that the establishment of the network has the characteristics of large investment, long investment period, strong monopoly and long product life cycle. This shows that the increase of users can share the huge investment cost of Facebook technology development, expansion influence and facility construction, but also because the long investment cycle and use period, Facebook with a monopoly feature without fear of the competitors to divide up profits, it in the long-term operation can slowly accumulate a large number of users, access to huge profits.
Indirect network effects: Increases in usage of one product or network spawn increases in the value of a complementary product or network, which can in turn increase the value of the original. Examples of complementary goods include software (such as an Office suite for operating systems) and DVDs (for DVD players). This is why Windows and Linux might compete not just for users, but for software developers. This is more accurately called a cross-side network effect in order to distinguish network benefits that cross distinct markets. Continuing with the Facebook example, as an information communication platform, the users pay their attention and the merchants pay their advertising fee. Through the above analysis of direct network externalities, the utility of Facebook increase with the number of users, and that promotes new users joining. Moreover, each additional unit user of Facebook represents the advertisement coverage increasing a corresponding unit. If a user shares
Figure 2 Facebook user network
an advertisement, the followers have the opportunity to see it as well as the spread of the advertising effect will be improved. The better the advertising effect, the more merchants pay for advertising, and Facebook operators obtain profits from it. Therefore, Facebook is a trading platform using indirect network externalities between users and merchants, it can explained by the two-sided markets.
ii. Two-sided markets
The two-sided market is similar to the principle of indirect network externality. It is a trading platform that gather the two parties with indirect network externalities characteristic, pricing different for each side and the price can effect the entire platform demand and transaction volume. Many mass media are two-sided markets. The two parties have indirect network externalities are customers and merchants, respectively.
Under the Internet economy the traditional one-sided market has turned to two-sided market even multi-sided market, and has a huge difference from one-sided market. At present, scholars to study the two-sided market from a different point of view to make a different interpretation. The definition of the mainstream mainly divided into two categories: Rochet and Tirole (2003)[ Jean-Charles Rochet, Jean Tirole (2003), Platform Competition in Two-Sided Markets], they from the "price structure non-neutrality" perspective defined the two-sided market as "a market has bilateral structure with the price level unchanged, the price structure changes will affect the platform trading volume." Armstrong (2006)[ Armstrong, M. (2006). Competition in two-sided markets. RAND Journal of Economics] from the "Cross-group Externalities" perspective defined it as " markets where users' net utility increases as the number of users on the other side increases." It is easy to see that the two-sided market need to meet the following conditions: both side of the platform have two or more groups of different users; there is the characteristic of network cross externalities, while the externalities can not be completely internalized, and both users get benefit because of the existence of other users; The existence of one or more Internet companies will internalize these external interests while obtain profit by providing a trading platform.
According to the above logic can also introduce the definition of the multi-sided market, that is, enterprises are faced with more than two different consumer groups, and there is a strong interaction between each other. Compared with one-sided market, two-sided market( or multi-sided market) has distinct characteristics:
1)Cross-group Externalities
The value of the product or service increases as the number of users increases, and it is the economies of scale from the same class of users. Two-sided market externalities depend not only on the number of users on the same side of the platform, but also on the number of users on the other side of the platform, which is a cross-network externality.
2)Asymmetry of Market Pricing
Based on the above understanding of the two-sided market, on a bilateral or multilateral market in order to maintain the balance of user demands, merchants must use asymmetric pricing, so as to attract more users to participate in the platform make more transactions and thereby achieve the purpose of strengthening the scale of enterprises.
Under bilateral or multilateral market enterprises are facing more complex competition than the one-sided market, because of the characteristics of two-sided (or multi-sided) markets, every side user has a strong interaction with others thus any change in the market will affect the other side of the market changes. Therefore, in the two-sided or multi-sided market, we must give more consideration to the competitive factors enterprises are facing.
iii. Competition generate monopoly
In the Internet economy, the competition in states but also in organizations are more reflected in the core technical competition, and with the accelerate speed of technology change, the product life cycle gradually shortened, technological innovation has become the key competency to victory in the fierce competition.
In 1999, the Alibaba Group established is facing the majority competition of SMEs in China. Starting from the B2B commerce, later extended to Taobao in the individual, it enable to build up the bridge between the two platforms. In order to promote the transaction, it has launched online payment (Alipay), instant messaging software (Ali Want), and an advertising supermarket platform (Alibaba website). Alibaba is fcous on the e-commerce, through the develop of new technology and new models gain users. The successful of Alibaba, especially in the B2B aspect is completely because of its independent innovation. Generally, the information products requirements for product standardization can only tolerate the existence of one technology, which is more conducive to incumbents or the possessor of strong technical superiority, but also increases the difficulty of the other competitor entry, thereby contributing to the monopoly trend. Whereas, due to the high extent openness of the Internet market, entry and exit are barrier freely. Therefore, as long as the new products have technical advantages and can be accepted by the market, other technologies and products can be eliminated , the possessor of strong technical superiority will occupy the entire market. This objectively lead to the phenomenon that stronger competition is more conducive to the formation of monopolies, and to further strengthen and consolidate the monopoly structure of the market.
From this, we see the monopoly in Internet economy is contrary to "monopoly eliminate competition". In the Internet economy the enterprises obtain monopoly power is the result of competition in the survival of the fittest, will also usher the constant challenge from new competitors to compete at a higher level of technology.
In Arrow's (1962) opinion "The preinvention monopoly power acts as a strong disincentive to further innovation". That based on two reasons: 1) monopoly enterprises lack the incentive to innovate. 2) the other enterprises' technology may be suppressed by monopolists. But from the monopoly enterprises(Facebook、Amazon、Netflix、Google) under the Internet economy, at least it is hard to find a monopolist lack the incentive to innovate.
In the network economy, especially in the information industry, the formation of monopoly is not from by monopoly, but mainly based on technology competition major in technological innovation. Therefore, this paper will called the emergence of monopoly in the Internet economy as a 'competitive monopoly' to distinguish it from traditional monopoly, and monopoly competition. However, the enterprises want to occupy any position and a maintain monopoly in Internet economy, must continue to improve their competitiveness, then the most effective ways is technical innovation. According to Burning Glass Technologies Labor Insights( Figure 3), US businesses posted job notices for approximately 807,450 core information technology( IT) jobs during Q4 of 2015, an increase of 39% over Q4 2014. The total core IT occupation workforce increased by an estimated 151,200 jobs in 2015. This explains a portion of the job posting data. Companies may be expanding or moving into new areas and need to employ more workers, the demand of developers is the highest one, thus we can draw a conclusion that innovation in Internet industry is very important.
In general, the higher the frequency of technological innovation, the easier it is to focus on a small number of enterprises and even individual enterprises. The more likely it is to form oligopolies and monopolies, enterprises will occupy the position of monopoly in long-term. On the contrary, the more the technological innovation scattered, the faster the frequency of a monopoly position of enterprises to replace. The increasingly fierce technological innovation combines competition and monopoly, and promotes the formation of competitive monopoly structure.
iv. The internal causes of monopoly
In the traditional industrial economy, the transaction price on the market can easy reflect the relationship between supply and demand, and thus through changes in the price and quantity can be a good expression of supply and demand balance of the market. But in the network economy, information and knowledge become a major factors in the era of knowledge expansion, particularly on the Internet, the higher the product sales, means that the greater the product network. The price changes are meaning based on customers' evaluation of information products value and sensitivity to prices, which lead to once the customers acceptance, the merchant will pricing in a very higher level, even exceed the original cost of production more than ten times. The higher the value of the product, the more consumers have an incentive to buy the product. To implement the network externalities, as soon as possible to achieve the critical capacity, manufacturers have sufficient motivation to improve product network rather than reduce production. Certainly, due to the marginal cost of the product is very low, companies can undersell even dumping it. The input factors change in the network economy make the merchants' market power increase significantly, that is enhance the monopoly power.
On the other hand, because consumers are highly sensitive to product prices, their evaluation and selection enhance the degree of competition between markets. Therefore, the sense of monopoly under the network economy and the traditional monopoly market is different, this is because the degree of control the price is primarily depends on the demand side, that is, customers valuation the degree of information products. This kind of competition creates market forces that make it impossible to price a product once it is divorced from a specific customer, which is the meaning of "competition" in such structure of the market.
From the above analysis, we can easily see that knowledge and information as the basis elements of the competitive monopoly market structure formation, the increasingly fierce technological innovation activities between enterprises is the conditions of competitive monopoly formation, technical incompatibility is the guarantee of competitive monopoly formation.
v. The competitive monopoly
Competitive monopoly market is evolved from the traditional market structure, it have similar characteristics with the traditional market structure (especially the imperfect competition market), but also showing different extent of variation. Competitive monopoly structure has the following characteristics compared with the oligopoly and monopoly competition structure, as shown in the below Table.
A Comparison of the Characteristics of Competitive Monopoly Market Structure
Characteristics Oligopoly Monopoly competitionCompetitive monopoly
FirmLittle Much Little
Product differenceLittle Big Huge
competitionStronger Strong Strongest
Entry&exit barrierBig Little Few
Price setter Enterprise Enterprise Consumer
Core competitivenessInnovation Brand Multi-factor
Social welfare effectNegative Negative Positive
Here are some of the main features of competitive monopoly structure describe:
1)The number of firms in the market are less but concentrated. In the competitive monopoly market, there are always one or several technical leaders occupy a major share of the market. In this market, the monopoly of the situation has been formed. However, the uncertainty of who occupies the oligopoly and the monopoly position is very high. The high degree of competition, especially the technological innovation, may lead to the replacement of the position at any moment. That is, the replacement rate of the monopoly position is very high.
2)Competition and Monopoly Strengthened the antinomy[ Refers to a real or apparent mutual incompatibility of two laws. It is a term used in logic and epistemology, particularly in the philosophy of Kant and Roberto Unger.]. Under the Internet economy, the degree of competition and monopoly in the monopoly structure have been strengthened. On the one hand, due to the characteristic of technical incompatibility and standardization of network, once the enterprise through technological innovation obtain the monopoly position, the above features will strengthen the monopoly of enterprises with a "winner take-all" situation, which lead to the monopoly of the market continues to increase; On the other hand, the degree of competition in the market are more intense. In the Internet economy, monopoly structure industry threshold to entry is very low, enterprises are free to enter and exit. In order to obtain more profits from the market, new entrants or potential competitors will try to replace the existing monopolized enterprises by technological innovation, product innovation and other means. In order to maintain its monopoly position, enterprise can not stop the pace of innovation, otherwise it will be eliminated. Therefore, the Internet economy under the monopoly situation is completely different from the traditional economy under the monopoly. The traditional monopoly structure means less degree competition and less competitors. In the Internet economy, not only the monopoly structure has been strengthened, but also the degree of competition is more intense, which in the traditional economy can not be achieved antinomy in the new economy has been fully reflected.
3) The total social welfare increases. Monopolistic structure in the traditional economy will lead to a decrease in both consumer surplus and total surplus. This is because the monopoly firm's pricing is much higher than the price at the time of competition, and the increase of the price leads to the decrease of the purchase quantity. Resulting in the loss of consumer welfare and social welfare. then, whether or not the monopoly structure of the Internet economy will bring the above losses? the answer is negative. Due to the network externality, the huge market share makes the gains of each network member increase remarkably, at the same time, it brings great network benefit to the enterprise, thus increasing the consumer surplus and producer surplus, the total social welfare can be increased. In Economides Flyer's model, the greater the number of firms in the market, the worse the social welfare situation. Therefore, monopoly is beneficial to the distribution of resource and improve the social welfare, which means the market is closer to Pareto Optimality.
Ⅳ. Competitive Monopoly and Innovation
i. Funding
In the competitive monopoly market structure, enterprises often have a strong monopoly position and market power. With the advantages of monopoly, the enterprises usually have abundant funds and strong human resources. Competitive monopoly enterprises attach great importance to R&D, they will increase the intensity of investment in R&D. What's more, because of its abundant funds, they completely have the ability to bear the risk of innovation. As the role of technological innovation in building the core competitiveness of enterprises is becoming increasingly prominent, and the competitive degree of competitive monopoly market structure is increasing, enterprises in this market will introduce and develop a large number of R&D developer with advanced technology and innovative ability. In nowadays, the typical network industry (such as telecommunications, the Internet, etc.) has proportion of R&D staff exceed 50%, and some even reached two-thirds. The the enterprises have a strong ability to invest in innovation, it means with the monopoly extent of the market structure increased, resources have increased, the ability to invest in innovation has gradually increased.
However, to the enterprise under competition market structure the fierce price competition cannot make them get enough profit to invest in innovation. That is unfavorable to innovation in the Internet economy. Hence, the monopoly will better than competitive market structure, and the degree of monopoly in the market promote the ability of enterprises to invest in innovation.
ii. Market power
Enterprises in competitive monopoly structure can gain more market information, demand and feedback by preponderance of their monopoly position, and carry out in-depth sorting and processing the data, and finally form new technological innovation direction. Especially in the Internet economy, the Internet has become the main media for people to communicate without the restraint of time and space, and has low cost, companies can get more consumer demands and information through this media; Competitive monopoly structure enterprises will use its market share and marketing channels to constantly exploit new markets, increase product sales. At the same time, monopolistic characteristics make it easier to gain recognition in market development period. Competitive monopoly enterprises also have great advantages in selling profit. As the company's products have more people recognized, the network value of the product increases, companies have the space of raise price, and with the marginal cost of the product is almost zero, the company received higher sales margins. In turn, the company invest sales revenue into the next stage of technological innovation activities to earn more profits, and so on in a virtuous circle.
We can see that the competitive monopoly structure enterprise through the market research, market development and the positive impact of sales profits to gain the market power control the price and enhance the ability of enterprises to achieve technological innovation.
In short, the competitive monopoly market structure enables enterprises to have a monopoly power, not only to promote the technological innovation capability of itself, while fierce competition has enhanced the enthusiasm of enterprise technological innovation and improve the motivation of enterprise innovation.
Ⅴ. Conclusion
Technological innovation capability is play a crucial role in Internet market. In this industry once the enterprise acquire the advance technological innovation capability which means gain the monopoly position and high market power. However, innovation need abundant funds and strong human resources, the enterprises in competition market are not had market power which could control the price in market thus their products' price are closer to marginal cost that lead them cannot have enough profit to invest fundings in innovation. Therefore, the competitive monopoly structure is favorable to innovation.
Despite all this, the report is left much to be desired. Because of the time to review and research material are not enough, the empirical researches are not deep, and the academic support not sufficient.