Monopoly, decreasing returns,and incentives to cost-reducing R&D

The present paper shows that it is possible to de ne cost innova- tions for which a monopolist has a higher incentive to invest than a social planner. This unveils the limits of the general claim, based on Arrow (1959), that a monopoly has a lower incentive to innovate than a social planner and therefore than socially desirable. In particular, exceptions to the rule are shown to arise only under decreasing returns. Further, it follows from the analysis, that the direction of the inequal- ity in the comparison of incentives to invest also depends upon the shape of the demand function. Finally, only under a restricted domain of analysis, a rule for determining whether a monopoly has lower or higher incentives to invest than a social planner is derived