Shedding light on the limits to innovation

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The story of the everlasting light bulb is one of the hoariest myths in business economics. But the myth is indeed a myth.

Last weekend, I bought some light bulbs for less than £2 each. The manufacturer claims that they use one quarter of the electricity of a conventional light bulb and they last ten times as long.

The story of the everlasting light bulb is one of the hoariest myths in business economics. According to legend, inventors have frequently come up with designs for an everlasting light bulb. These products would cost no more to make. But a conspiracy of light bulb manufacturers has always ensured that these innovations are suppressed, so that the continuing market for light bulbs is not spoiled.

As with all urban myths, there are numerous variations. The product is not always a light bulb. The same claims are made for tights: what woman would not rush to purchase a pair of long-lasting tights? And why don’t batteries go on for ever. It must surely be possible to build automobiles that would never wear out. But not only do Ford and General Motors choose not to do this: they constantly introduce superficial redesigns to their products to induce us to buy unnecessary replacements. We are all led to believe that built-in obsolescence is endemic to contemporary capitalism.

But the myth is indeed a myth. We do not need to appeal to the better nature, or environmental conscience, of light bulb manufacturers. They will not suppress the everlasting light bulb because it does not pay them to do so. The clearest demonstration of the issues was provided thirty years ago by an Australian economist, Peter Swan.

Suppose there are several competing producers of light bulbs. Our hypothetical inventor approaches one of them. The firm will indeed recognise that ultimately, when all the world’s bulbs have been replaced by the new discovery, its sales will fall. But until then, it will enjoy a hundred per cent market share. Most of the lost sales will be the lost sales of its competitors. Innovation has always been the mainstay of competition and no competitive firm would pass up such an opportunity.

Now give the story a more sinister turn. The myth relies on conspiracy. Even if an individual firm would seize avidly the opportunity created by the everlasting light bulb, the manufacturers would establish a cartel to see that our inventor was assassinated or otherwise removed from the scene.

But would they? Visualise yourself as the light bulb king, a John D. Rockefeller or Bill Gates striding above the world’s light bulb industry. It is easiest to see how you would respond to the inventor if you imagine yourself renting rather than selling the services of your bulbs. And it is very likely that if you were a light bulb monopolist, this is what you would do. Renting out these prized objects would allow you to discriminate by reference to the ultimate use, charging more for office and public lighting than for domestic illumination. This is what utilities generally did when they had a monopoly. It is how Xerox behaved, for example, so long as their patents over photocopiers remained effective. Rental gives you control only once the photocopying market became competitive did sales take over from rental as the principal means of supply.

In such a world, the incentives of the light bulb monopoly are to change whatever rental the market will bear, and to provide that service as cheaply as possible. The monopoly will grasp the benefits of the everlasting bulb for itself, and thank the inventor for adding to its profits. The rental structure makes the issue particularly clear, but there is no real difference if you monopolise the sale of light bulbs rather than the provision of light bulb services. You recoup the benefits of the new technology in the price of the bulb.

So a competitive firm would wish to introduce the everlasting light bulb as soon as possible, and so would a cartel or monopoly. It is a little harder, but still relatively straightforward, to deal with the cases in between perfect competition and true monopoly, and to show that the same arguments hold.

Built-in obsolescence arises mainly because consumers genuinely want new things. Trivially new brands of washing powder, or restyled automobile designs, or new season’s fashions, are all the results of competition: they arise from rivalry, not competition.

And this account fits reasonably well with what has happened in the light bulb market. It was always possible to manufacture light bulbs that would last for many years. But the higher cost and lower efficiency of these bulbs meant that these were not in fact an attractive proposition for consumers. Only recently did new technology enable long life, low energy bulbs to be made at costs reasonably comparable to those of conventional bulbs.

And so long as the number of manufacturers of these new bulbs was relatively small, and production limited, their high prices took full account of their value to consumers. But as competition in the market increased, so price fell towards the cost of supply. Which is why I was able to buy my bulbs for £1.90. And the reason there are no eternal automobiles or indestructible tights is that at the price and in the quality at which these goods can be manufactured, they are not products which many people wish to buy.

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