Equilibrium in a perfectly competitive market results in the greatest amount of economic surplus, or total benefit to society, from the production of a good
Why, then, did Joseph Schumpeter argue that an economy may benefit more from firms that have market power than from firms that are perfectly competitive?
Schumpeter did not deny that perfectly competitive firms produced the greatest amount of consumer surplus, but this result does not address which type of market structure is best for developing new products. Schumpeter pointed to the large costs of product development; how can small, perfectly competitive firms afford the monetary cost and the risk of failure that product development requires? Only large firms in monopoly or oligopoly industries can afford investments in research and development, and the inevitable failures that accompany research. According to Schumpeter, the higher prices firms with market power charge are less important than the benefits from new products these firms introduce to the market.
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