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Computing welfare losses from data under imperfect competition with heterogeneous goods

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  • Luis C. Corchon
  • Galina Zudenkova

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Abstract

We study the percentage of welfare losses (PWL) yielded by imperfect competition under product differentiation. When demand is linear, 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 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 .rms. In all these cases 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

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we082616.

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Date of creation: May 2008
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Handle: RePEc:cte:werepe:we082616

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

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  1. 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.
  2. 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.
  3. 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.
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  5. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  6. Daughety, Andrew F, 1990. "Beneficial Concentration," American Economic Review, American Economic Association, vol. 80(5), pages 1231-37, December.
  7. Corchón, Luis C., 2008. "Welfare losses under Cournot competition," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1120-1131, September.
  8. Cowling, Keith & Mueller, Dennis C, 1978. "The Social Costs of Monopoly Power," Economic Journal, Royal Economic Society, vol. 88(352), pages 727-48, December.
  9. 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.
  10. Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers 8880, University of California at Berkeley.
  11. 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.
  12. 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.
  13. Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
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Cited by:
  1. Robert Ritz, 2013. "On welfare losses due to imperfect competition," Cambridge Working Papers in Economics 1334, Faculty of Economics, University of Cambridge.
  2. 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.
  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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