1987 Articles

Technological Change, Sunk Costs, and Competition

Stiglitz, Joseph E.

The purpose of this article is to address the validity or generality of the premise that potential competition suffices to ensure economic efficiency. It is a paper as much about the models used to justify beliefs about the design of economic policy as it is about what those policies should be. Markets in which technological change is important are never perfectly competitive, and in imperfectly competitive markets, vertical restraints may also serve to alter the degree of competition. There are a number of reasons why the conventional theory of competition does not describe well the industrial sectors in which technological change is important, among them that technological change inherently entails an element of increasing returns and that expenditures on research and development are, for the most part, sunk costs. While traditional economic analysis argued that in the presence of increasing returns there was a trade-off between having many firms with less monopoly power but a loss in productive efficiency or a few firms with more power and more efficiency, the contestability doctrine claims there is no trade-off.