The errors of definitions multiply themselves according as the reckoning proceeds; and lead men into absurdities, which at last they see but cannot avoid, without reckoning anew from the beginning.

Economists long ago pointed out why it is bad for a single firm to dominate a market. In essence, the trouble with monopolists is that they can set prices almost as they please. Unlike in competitive industries, a monopolist's price, in the jargon, can be way above the marginal cost of production. Worse, immunity to competition makes a monopolist fat and lazy. It needn't worry too much about keeping customers happy. Worse still, if a company has no fear of competition, why should it bother creating new and better products?

Despite this, compelling evidence that monopolists stifle innovation is harder to come by than simple theory suggests. Joseph Schumpeter, an Austrian economist, pointed out many years ago that established firms play a big role in innovation. In modern times, it appears that many product innovations, in industries from razor blades to software, are made by companies that have a dominant share of the market. Most mainstream economists, however, have had difficulty explaining why this might be so.

One possibility might be that the empirical connection between market share and innovation is spurious: might big firms innovate more simply because they are big, not because they are dominant? A paper published a few years ago... did much to resolve this empirical question. In a detailed analysis of British manufacturing firms, it found that higher market shares do go with higher investment in research and development, which in turn is likely to lead to greater innovation. Still, the question remains: why does it happen?

Note to Jason the Libertarian - it would seem that political parties do not engage in research and development, so this may not be germaine to our earlier conversation. But is this so different from the polling and other methods employed by the Democrats or Republicans? Political parties try to supply what the voter wants, and they spend a lot of time and money figuring out what that is. It's not so different.

A new paper by Federico Etro, of the University of Milan, aims to resolve the paradox. He sets out a model in which a market leader has a greater incentive than any other firm to keep innovating and thus stay on top. Blessed with scale and market knowledge, it is better placed than potential rivals to commit itself to financing innovations. Oddly--paradoxically, if you like--in fighting to maintain its monopoly it acts more competitively than firms in markets in which there is no obviously dominant player.

Doesn't this imply that the Democrats and Republicans must be innovative parties in order to maintain their control of American politics? That's exactly what it means. The Republicans no longer have abolition as their primary plank. Democrats are no longer anti-Federalist in their aims. They adapt in order to maintain their superiority over other parties.

The most important requirement for this result is a lack of barriers to entry: these might include, for example, big capital outlays to fund the building of new laboratories, or regulatory or licensingvrestrictions that make it hard for new firms to threaten an incumbent. If there are no such barriers, a monopolist will have an excellent reason to innovate before any potential competitor comes up with the next new thing. It stands to lose its current, bloated profits if it does not; it stands to gain plenty from continued market dominance if it does.

Here we have a mix - there are huge barriers to entry for third parties in this country. Thus, in some ways, the GOP and Democrats have an easy time playing off of one another and not worrying about the "threat" from the Green Party, Reform Party, LP, etc. However, there is no barrier to entry in the parties themselves. They are more vulnerable in this sense than any corporation. What effect would a million libertarians have on the GOP? Or on the Democrats?