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BPEA Article

Technological Change, Sunk Costs, and Competition

Abstract

THERE IS A PERSISTENT divergence between the widespread views of the virtues of capitalism and the models we use to justify those beliefs. While it is the dynamic properties of capitalism, the increases in the standards of living to which it has given rise, that constitute the basis of our confidence in its superiority to other forms of economic organization, the theory-at least the version we teach to students-is based on a model that assumes an unchanging technology. This divergence is disturbing, and not only because of the intellectual dissonance to which it should give rise. Views concerning important policy issues are frequently based on simplistic models, regardless of how inappropriate those models are. For instance, considerations of the need for and consequences of antitrust policies, including policies aimed at restricting vertical restraints of trade, are frequently based on the standard competitive paradigm. In that context it is argued, for instance, that producers would impose vertical restraints only if the restraints enhanced efficiency. Yet 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.

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