Journal Article The Influence of Monopoly on Product Innovation: Rejoinder Get access Peter L. Swan Peter L. Swan Monash University, Australia Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 86, Issue 2, May 1972, Pages 346–349, https://doi.org/10.2307/1880572 Published: 01 May 1972

I. Introduction and summary, 627. — II. Assumptions, 629. — III. The monopoly and purely competitive decisions, 631. — IV. The generality of the results, 633. — V. Some concluding remarks, 635. — Appendix (to Section III), 636.

[Understanding of the relationship between producer choice of product qualities and consumer preferences has been enhanced by the development of models specialized to a particular quality attribute--durability. Durability choice is invariant with respect to market structure under certain conditions but capital market imperfections and income taxes can upset this strong independence result. Income taxes are shown to mimic the effect of a capital market distortion on a monopolist selling a durable. Moreover, contrary to previous results the tax can increase as well as lower durability. A tax on "true income" is neutral in its effect and hence tax reform provides an alternative to regulatory control of product life.]

Puzzle 1: Was Judge Hand correct in his celebrated judicial opinion that Alcoa's monopoly in "virgin" aluminum provided indirect control over "secondary" production? Answer: Estimates based on three models suggest that the "procompetitive" effect of recycling was largely offset by a reduction in virgin production in anticipation of future conversion into secondary. Thus, Hand's judgment appears sound. Puzzle 2: Is it in Alcoa's own interests to suppress recycling of scrap aluminum if feasible? Answer: If current users show that they value the future use of the product by selling scrap to merchants, then Alcoa is likely to value the recycling market also. If users discard scrap which is subsequently scavenged, then Alcoa is likely to be harmed by such activity.

This paper analyzes the optimal financial structure for a firm in which the top manager must provide incentives to a subordinate in addition to exerting directly productive efforts. Optimal capital structure is shown to involve a moderate level of debt with a substantial penalty for default, and passive shareholders. In a two- or three-layer hierarchy, optimal leverage is shown to decrease as either the number of hierarchical levels or the importance of agents further down the hierarchy increases. This and other implications of the model square well with existing evidence and suggest new directions for empirical work.

Worker incentive schemes are invariably assumed to be administered by an owner-entrepreneur who has an incentive to understate worker performance after the event. While tournaments can overcome this problem, they discourage cooperation between workers. We show that a professional manager concerned with equality between workers and with avoiding bankruptcy rather than maximizing shareholder wealth will conduct a tournament that preserves individual effort incentives while promoting cooperation between workers. The theory predicts lower debt levels and more compressed pay scales as cooperation becomes more important. In the limit this becomes a group bonus scheme, supported by "blue-chip" debt.