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):
´
1 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
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