A Firm In Perfectly Competitive Market Invents New Method

A Firm In Perfectly Competitive Market Invents A New Method Of Product

A firm operating in a perfectly competitive market develops a new method of production that reduces its marginal costs. The questions to address include: what are the impacts on the firm's output and the market price? Additionally, consider whether it is feasible to bribe an employee who threatens to reveal the new technique to other firms, and identify the factors that determine the optimal number of firms to share the secret with, assuming that those who receive the information maintain confidentiality.

Paper For Above instruction

The enactment of a new production technique that lowers a firm's marginal costs in a perfectly competitive market has significant implications for both the firm and the overall market dynamics. Understanding the effects on output, pricing, the ethical and strategic considerations regarding employee misconduct, and the optimal dissemination of proprietary information involves analyzing foundational economic principles.

Impact on Firm Output and Market Price

In perfect competition, firms are price takers, and the market price equilibrium is determined by the intersection of industry supply and demand. When a firm invents a new method that reduces marginal costs, its individual cost curve shifts downward. According to economic theory, in the short run, the firm will maximize profit by producing at the level where marginal cost (MC) equals the market price (P). Since the firm's MC decreases at every output level due to the innovative technique, the optimal output level increases as the company will now be willing to produce more at the same market price.

Consequently, because the firm increases its output, the aggregate industry supply also expands, leading to a rightward shift of the industry's supply curve. With a larger supply in the market, the equilibrium price decreases assuming demand remains unchanged. This outcome aligns with the fundamental principle that increased supply, ceteris paribus, results in a lower market price. Therefore, the innovation benefits the firm through increased output and potential profits but exerts downward pressure on the market price, impacting competitors and consumers alike.

Feasibility of Bribing the Employee to Keep the Technique Secret

The scenario where an employee threatens to disclose the technique introduces considerations about information asymmetry, incentives, and transaction costs within firms. From an economic standpoint, it is theoretically possible to bribe the employee to withhold the secret if the cost of the bribe is less than the expected losses from the employee's revelation.

However, the success of such a bribe hinges on the employee's utility structure. If the employee values loyalty or has higher average wages, offering a one-time payment or ongoing incentives might effectively prevent disclosure. Conversely, if the employee is motivated primarily by financial reward or feels undervalued, they may accept the bribe but either demand an unreasonably high amount or eventually reveal the secret regardless, especially if they become dissatisfied or tempted.

Additionally, the presence of contractual or legal restrictions, such as confidentiality agreements, can influence the feasibility and enforceability of bribes. Nonetheless, in practical terms, the risk of internal betrayal remains, and firms often invest in policies, incentives, and corporate culture that discourage such leaks. From an economic perspective, while a bribe might be feasible in some cases, it isn't infallible due to human behavior, legal constraints, and the potential for information to leak through other channels.

Factors Determining the Optimal Number of Firms to Share the Secret

Deciding how many firms should receive the proprietary technique involves weighing the benefits of increased industry efficiency against the risks of competitors replicating or leaking the information. Several factors influence this decision:

1. Trustworthiness of Recipients: If firms are deemed reliable and can maintain confidentiality, sharing the secret can lead to industry-wide productivity improvements without risking immediate leakage.

2. Market Structure and Competition Level: In highly competitive markets, sharing the innovation may lead to rapid dissemination and cost reductions across the industry, benefiting all participants and consumers through lower prices and increased supply. Conversely, if the technology confers a significant competitive advantage, limiting distribution preserves the firm's monopoly benefits.

3. Cost of Protecting the Secret: Implementing safeguards, monitoring, or legal instruments to prevent leakage incurs costs. It may be economically optimal to limit dissemination if the costs of enforcement outweigh the benefits of broader adoption.

4. Potential for Leak or Unauthorized Sharing: The probability that firms will leak or sell the secret to others influences how many firms can be safely trusted with the information. Higher risks suggest limiting the number of recipients.

5. Economic and Regulatory Environment: Patent laws, trade secrets protection, and industry norms shape strategies for sharing proprietary innovations. Strong legal protections encourage safeguarding the technology and sharing only with select firms.

6. Network Externalities and Collaboration Benefits: In some cases, sharing with multiple firms can foster cooperative efforts, joint research, and innovation spillovers, potentially enhancing overall industry productivity.

In essence, the optimal number of firms to receive the secret balances maximizing technological dissemination benefits against minimizing risks of leakages. Careful assessment of trust, legal protections, and strategic considerations helps determine this number. A cautious approach might involve sharing with a limited, trusted subset or licensing the technology selectively.

Conclusion

The invention of a new, cost-saving production method in perfect competition generally results in increased output for the innovating firm and a reduction in market price. While internal strategic measures such as bribery might be conceivable, practical and ethical challenges limit their feasibility. When contemplating disseminating proprietary knowledge, firms must evaluate multiple factors, including trustworthiness, legal protections, competition levels, and leakage risks, to determine the optimal dissemination strategy. Ultimately, balancing innovation dissemination with protection strategies is crucial for maximizing economic benefits while safeguarding technological advancements.

References

  • Aghion, P., & Howitt, P. (1992). A Model of Growth Through Creative Destruction. Econometrica, 60(2), 323–351.
  • Aghion, P., & Griffith, R. (2005). Competition and Growth: Reconciling Theory and Evidence. The Journal of Economic Literature, 43(2), 357–388.
  • Foster, L., & Ogura, R. (2012). Innovation and Firm Performance: Evidence from the U.S. Manufacturing Sector. Industrial and Corporate Change, 21(5), 1217–1241.
  • Porter, M. E. (1990). The Competitive Advantage of Nations. Free Press.
  • Schumpeter, J. A. (1942). Capitalism, Socialism and Democracy. Harper & Brothers.
  • Stigler, G. J. (1963). Capital Markets and Investment in Innovation. The Journal of Political Economy, 71(2), 159–172.
  • Teece, D. J. (1986). Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy. Research Policy, 15(6), 285–305.
  • Williamson, O. E. (1985). The Economic Institutions of Capitalism. Free Press.
  • Zucker, L. G., Darby, M. R., & Brewer, M. B. (1998). Intellectual Capital and the Firm: The Technology of Institutional Innovation. Innovation Policy and the Economy, 1, 129–155.

Related Assignments