Computing welfare losses from data under imperfect competition with heterogeneous goods

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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 and firms are identical, if prices, outputs, costs and the number of firms can be observed, PWL is arbitrary in both Cournot and Bertrand equilibria. However, if the elasticity of demand can be estimated, under a Cournot equilibrium, PWL is a function of the elasticity of demand, the number of firms and the price-marginal cost margin. In a Bertrand equilibrium, PWL is a function of the cross elasticity of demand, the number of firms and the price-marginal cost margin. When firms are not identical, we provide conditions under which PWL increases with concentration. When demand is isoelastic and there are many firms, PWL can be computed from prices, outputs, costs and the number of firms. In all these cases we find that price-marginal cost margins and demand elasticities may influence PWL in quite a counterintuitive way.

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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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This paper has been announced in the following NEP Reports:

NEP-ALL-2008-06-21 (All new papers)
NEP-COM-2008-06-21 (Industrial Competition)
NEP-MIC-2008-06-21 (Microeconomics)

References listed on IDEAS
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X. Henry Wang & Judy Hsu, 2005. "On Welfare under Cournot and Bertrand Competition in Differentiated Oligopolies," Working Papers 0514, Department of Economics, University of Missouri. [Downloadable!]
Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Other versions:
- Häckner, Jonas, 1999. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Research Papers in Economics 1999:9, Stockholm University, Department of Economics.
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.

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