[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

This is the third reason why technological change and imperfect competition
go together: the marginal cost falls as the scale of production (and the experience
accumulated) increases. The first firm to enter an industry therefore has an
advantage over other firms. Even if some of what the first company has learned
spills over into other firms, not all of it does. Because of the knowledge the first
firm has gained, its costs will be below those of potential rivals, and thus it can
always undercut them. Since potential entrants know of this advantage, they are
reluctant to enter industries in which learning by doing has a significant impact
on costs. By the same token, companies realize that if they can find a product
that provides significant benefits from learning by doing, the profits they earn
will be relatively secure. Hence, just as firms race to be the first to obtain a patent,
so too they race to be the first to enter a product market in which there is a
steep learning curve. This behavior is commonly displayed in the computer
chip industry.
When learning by doing is important, firms will produce beyond the point at
which marginal revenue equals current marginal costs, because producing more
today has an extra benefit. It reduces future costs of production. How much extra
a firm produces depends on the rapidity with which experience pays off.
ACCESS TO CAPITAL MARKETS
Banks are generally unwilling to lend funds to finance R & D expenditures, because
the ventures are often very risky and their risks cannot be insured. When a bank
makes a loan for a building, the bank winds up with the building if the borrower
defaults. If the bank lends for R & D and the research project fails, or a rival beats
the firm to the patent office, the bank may wind up with nothing. Banks also often
have a hard time judging the prospects of an R & D endeavor—inventors are always
optimistic about their ideas. In addition, the inventor is often reluctant to disclose
all the information about his idea, either to banks or to potential investors, fearful
that someone will steal his idea and beat him either to the market or to the
patent office.
Established firms in industries with limited competition and growing demand have
little difficulty financing their research expenditures—they can pay for R & D out of
their profits. For this reason, most R & D occurs in such firms. In contrast, raising
capital is a problem for new and small firms, and also for firms in industries in which
intense competition limits the profits that any one company can earn. Thus, a firm’s
dominant position in an industry may be self-perpetuating. Its greater output gives
it more to gain from innovations that reduce the cost of production. And its greater
profits give it more resources to expend on R & D.
Today much of the R & D in new and small companies is financed by venture
capital firms. These firms raise capital, mainly from pension funds, insurance companies,
and wealthy individuals, and then invest it in the most promising R & D ventures.
Venture capital firms often demand, as compensation for their risk taking, a
significant share of the new enterprise, and they usually keep close tabs on how
their money is spent.
462 ∂ CHAPTER 20 TECHNOLOGICAL CHANGE