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Computing welfare losses from data under imperfect competition with heterogeneous goods

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  • Corchón, Luis C.
  • Zudenkova, Galina

Abstract

We study the percentage of welfare losses (PWL) yielded by imperfect competition under product differentiation. When demand is linear, even if prices, outputs, costs and the number of firms can be observed, PWL is arbitrary in both Cournot and Bertrand equilibria. If in addition the elasticity of demand (resp. cross elasticity of demand) is known, we can calculate PWL in a Cournot (resp. Bertrand) equilibrium. When demand is isoelastic and there are many firms, PWL can be computed from prices, outputs, costs and the number of firms. We find that price-marginal cost margins and demand elasticities may influence PWL in a counterintuitive way. We also provide conditions under which PWL increases or decreases with concentration.

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Bibliographic Info

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

Volume (Year): 27 (2009)
Issue (Month): 6 (November)
Pages: 646-654

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Handle: RePEc:eee:indorg:v:27:y:2009:i:6:p:646-654

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

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Keywords: Welfare losses Product differentiation Cournot equilibrium Bertrand equilibrium Spence model;

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References

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  1. Cowling, Keith & Mueller, Dennis C, 1978. "The Social Costs of Monopoly Power," Economic Journal, Royal Economic Society, vol. 88(352), pages 727-48, December.
  2. Malcolm Coate, 2005. "Empirical Analysis of Merger Enforcement Under the 1992 Merger Guidelines," Review of Industrial Organization, Springer, vol. 27(4), pages 279-301, December.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  4. Farrell, J. & Shapiro, C., 1988. "Horizontal Mergers: An Equilibrium Analysis," Papers 17, Princeton, Woodrow Wilson School - Discussion Paper.
  5. Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
  6. Hackner, Jonas, 2000. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Journal of Economic Theory, Elsevier, vol. 93(2), pages 233-239, August.
  7. Judy Hsu & X. Wang, 2005. "On Welfare under Cournot and Bertrand Competition in Differentiated Oligopolies," Review of Industrial Organization, Springer, vol. 27(2), pages 185-191, 09.
  8. Amir, Rabah & Jin, Jim Y., 2001. "Cournot and Bertrand equilibria compared: substitutability, complementarity and concavity," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 303-317, March.
  9. 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.
  10. Luis C. Corchon, 2006. "Welfare losses under cournot competition," Economics Working Papers we063910, Universidad Carlos III, Departamento de Economía.
  11. Anderson, Simon P. & Renault, Regis, 2003. "Efficiency and surplus bounds in Cournot competition," Journal of Economic Theory, Elsevier, vol. 113(2), pages 253-264, December.
  12. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  13. Daughety, Andrew F, 1990. "Beneficial Concentration," American Economic Review, American Economic Association, vol. 80(5), pages 1231-37, December.
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Cited by:
  1. Simai He & Xiaoguo Wang & Shuzhong Zhang, 2013. "On a generalized Cournot oligopolistic competition game," Journal of Global Optimization, Springer, vol. 56(4), pages 1335-1345, August.
  2. Robert Ritz, 2013. "On welfare losses due to imperfect competition," Cambridge Working Papers in Economics 1334, Faculty of Economics, University of Cambridge.
  3. Ritz, R.A., 2012. "On welfare losses due to imperfect competition," Cambridge Working Papers in Economics 1234, Faculty of Economics, University of Cambridge.

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