Welfare losses under Cournot competition
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.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- C.C. von Weizsaker, 1980. "A Welfare Analysis of Barriers to Entry," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 399-420, Autumn.
- Kotaro Suzumura & Kazuharu Kiyono, 1987. "Entry Barriers and Economic Welfare," Review of Economic Studies, Oxford University Press, vol. 54(1), pages 157-167.
- 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.
- Simon P. Anderson & Regis Renault, 2001.
"Effciency and surplus bounds in Cournot competition,"
Virginia Economics Online Papers
353, University of Virginia, Department of Economics.
- 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.
- Simon P. Anderson & Régis Renault, 2001. "Efficiency and surplus bounds in Cournot competition," Virginia Economics Online Papers 360, University of Virginia, Department of Economics.
- 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.
- Fraysse, J. & Moreaux, M., 1981. "Cournot equilibrium in large markets under increasing returns," Economics Letters, Elsevier, vol. 8(3), pages 217-220.
- Jeffrey Campbell, 2000.
"Market Size Matters,"
Econometric Society World Congress 2000 Contributed Papers
1225, Econometric Society.
- Daughety, Andrew F, 1990. "Beneficial Concentration," American Economic Review, American Economic Association, vol. 80(5), pages 1231-1237, December.
- Javier M. López-Cuñat, 1999. "One-stage and two-stage entry Cournot equilibria," Investigaciones Economicas, Fundación SEPI, vol. 23(1), pages 115-128, January.
- 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.
- William Novshek, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 473-486.
- Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
- 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.
- Bresnahan, T.F & Reiss, P.C., 1989.
"Entry And Competition In Concentrated Markets,"
151, Stanford - Studies in Industry Economics.
- Guesnerie, Roger & Hart, Oliver, 1985. "Welfare Losses Due to Imperfect Competition: Asymptotic Results for Cournot Nash Equilibria with and without Free Entry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 525-545, October.
- Yarrow, G K, 1985. "Welfare Losses in Oligopoly and Monopolistic Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 515-529, June.
When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:26:y:2008:i:5:p:1120-1131. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If references are entirely missing, you can add them using this form.