And we are comparing the profits with innovation and the profits without.
With innovation, of course, our profits are going to be 10,000 as we just
calculated. Without innovation our profits are
going to be 0, so the difference between the two is the value of innovation for
the firm who wants to enter a market that's currently occupied by a
monopolist. So the interesting bit now is that we can
compare with the two different scenarios, the monopolies with entry and the
monopolies without the threat of entry. And of course, we can also include the
competitive market, so the value of innovation in a competitive market is
9,900 Euros. The value of innovation for a monopolist
who is not threatened by an entrant is 8,000.
Once he gets threatened by entry his incentives to innovate shoot up to
15,000, and for the entrant it's 10,000. So just looking at these numbers we can
see what we call the efficiency effect. The efficiency effect suggests that
under the threat of entry, a monopolist has higher incentives to innovate than a
potential entrant in the market. So, 15,000 is more than 10,000, why?
Because he's interested in trying to predict his monopoly position.