E C O N O M I C R E P O R T O F T H E P R E S I D E N T

government often chose to permit one monopoly provider to serve a geographicregion but subjected the monopoly firm to rate regulation to preventconsumers from being overcharged. In part, this policy response reflected aview that some industries are “natural monopolies.” In a natural monopoly,high fixed costs may make competition inefficient because a single providercould instead deliver service at the lowest possible cost. Also, in industrieslike the telephone industry, where demand-side network effects are important,previous attempts at competition had ultimately foundered as onedominant network emerged.In other industries, however, competition seemed more effective atrestraining market power, and government policy favored continued competition.In the case of automobiles, despite large economies of scale at individualplants, several producers were able to effectively compete in the largemarket pioneered by Ford, and policy intervention was unnecessary. In theoil industry, where combinations such as the Standard Oil trust threatenedcompetition, government did intervene, but rather than establish a regulatedmonopoly, it used the antitrust laws to create more competition. These earlypolicy responses shaped each of these industries during the years thatfollowed, and these policies are still applied to some firms today. Just as theeconomy has changed over the last century, however, so, too, has the range ofpolicy responses available to promote competition as an alternative toregulation, as discussed more fully below.Innovation and Change in the AmericanEconomy TodayMany of the same manufacturing industries that were just emerging at thebeginning of the century continue to thrive, but new technologies and newprocesses are revitalizing these established industries and creating new ones.These innovations are taking place throughout the economy, and manyinvolve both new technology and new ways of organizing the workplace.Manufacturing industries remain dynamic and innovative, reflecting thepace of technological change. Manufacturers creating new products andprocesses account for about three-quarters of company-funded industrialR&D expenditure in the United States. Productivity growth in manufacturingalso remains high, averaging 4.2 percent per year between 1993 and thethird quarter of 1999, and these firms remain an important source of jobs forworkers without college degrees. In an increasingly global economy, however,many manufacturing businesses have faced pressure to adapt to new ways ofdoing business in order to compete effectively with foreign companies.Chapter 3 | 103