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Welfare losses under Cournot competition

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  • Corchón, Luis C.

Abstract

We find that in a market for a homogeneous good where firms are identical, compete in quantities and produce with constant returns, the percentage of wel-fare losses (PWL) is small with as few as five competitors for a class of demand functions which includes linear and isoelastic cases. However with fixed costs and asymmetric firms PWL can be large. We provide exact formulae of PWL and robust constructions of markets were PWL is close to one in these two cases. We show that the market structure that maximizes PWL is either monopoly or dominant firm, depending on demand. Finally we prove that PWL is minimized when all firms are identical, a clear indication that the assumption of identical firms biases the estimation of PWL downwards.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 26 (2008)
Issue (Month): 5 (September)
Pages: 1120-1131

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Handle: RePEc:eee:indorg:v:26:y:2008:i:5:p:1120-1131

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Farrell, Joseph & Shapiro, Carl, 1988. "Horizontal Mergers: An Equilibrium Analysis," Department of Economics, Working Paper Series qt0tp305nx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Simon P. Anderson & Régis Renault, 2001. "Efficiency and surplus bounds in Cournot competition," Virginia Economics Online Papers 360, University of Virginia, Department of Economics.
  3. Javier M. López-Cuñat, 1999. "One-stage and two-stage entry Cournot equilibria," Investigaciones Economicas, Fundación SEPI, vol. 23(1), pages 115-128, January.
  4. McHardy, J.P., 2000. "Miscalculations of Monopoly and Oligopoly Welfare Losses with Linear Demand," Papers 274, Universite de Nantes - Economie Internationale et de l'Entreprise.
  5. Suzumura, Kotaro & Kiyono, Kazuharu, 1987. "Entry Barriers and Economic Welfare," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 157-67, January.
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  7. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers 151, Stanford - Studies in Industry Economics.
  8. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  9. Jeffrey R. Campbell & Hugo Hopenhayn, 2003. "Market size matters," Working Paper Series WP-03-12, Federal Reserve Bank of Chicago.
  10. Dasgupta, Partha & Ushio, Yoshiaki, 1981. "On the rate of convergence of oligopoly equilibria in large markets : An example," Economics Letters, Elsevier, vol. 8(1), pages 13-17.
  11. Fraysse, J. & Moreaux, M., 1981. "Cournot equilibrium in large markets under increasing returns," Economics Letters, Elsevier, vol. 8(3), pages 217-220.
  12. Novshek, William, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 473-86, April.
  13. Daughety, Andrew F, 1990. "Beneficial Concentration," American Economic Review, American Economic Association, vol. 80(5), pages 1231-37, December.
  14. Yarrow, G K, 1985. "Welfare Losses in Oligopoly and Monopolistic Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 515-29, June.
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Cited by:
  1. Corchón, Luis C. & Zudenkova, Galina, . "Computing welfare losses from data under imperfect competition with heterogeneous goods," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/2717, Universidad Carlos III de Madrid.
  2. Robert A. Ritz, 2008. "Cost pass-through under delegation," Economics Series Working Papers 404, University of Oxford, Department of Economics.
  3. Andrew F. Newman & Patrick Legros, 2011. "Incomplete Contracts and Industrial Organization: A Survey," Boston University - Department of Economics - Working Papers Series WP2011-036, Boston University - Department of Economics.

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