Economic growth and economic development 599

Introduction to Modern Economic Growth When the monopolist charges this limit price, its profits per unit would be profits per unit = (γ − 1) ψ = (γ − 1) (1 − β) , which is less than β, the profits per unit that the monopolist made in the absence of the competitive fringe What is the implication of this on the rate of economic growth? It is straightforward to work out that in this case the economy would grow at a slower rate For example, in the baseline model with the lab-equipment technology, this growth rate would be (see Exercise 13.13): ´ ³ −1/β ηγ (γ − 1) (1 − β)−(1−β)/β L − ρ , g∗ = θ which is less than (13.20) Therefore, in this model, perhaps somewhat counterintuitively, greater competition, which reduces markups (and thus static distortions), also reduces long-run growth This is because profits are important in this model to encourage innovation by new research firms If these profits are cut, incentives for research are also reduced We can also interpret γ as a parameter of anti-trust (competition) policy A more strict anti-trust policy can correspond to a lower value of γ, reducing the markups that monopolists can charge This analysis shows that in the baseline model of endogenous technological change anti-trust policy would reduce economic growth Naturally, welfare is not the same as growth, and some degree of competition reducing prices below the unconstrained monopolistic level might be useful for welfare depending on the discount rate of the representative household Essentially, with a lower markup, households are happier in the present, but suffer slower consumption growth The exact tradeoff between these two opposing effects depends on the discount rate of the representative household Similar results apply when we consider patent policy In practice, patents are for limited durations In the baseline model, we assumed that patents are perpetual; once a firm invents a new good, it has a fully-enforced patent forever and it becomes the monopolist for that good forever If patents are enforced strictly, then this might rule out the competitive fringe from competing, restoring the growth rate of the economy to (13.20) Also, even in the absence of the competitive fringe, we 585