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Concentration Indices, Welfare Distortions, and Misallocation in Oligopoly

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  • Volker Nocke
  • Nicolas Schutz

Abstract

We study welfare distortions in a multiproduct-firm pricing game with constant elasticity of substitution (CES) or multinomial logit (MNL) demand. Using approximations both around small market shares and around monopolistic competition conduct, we identify sufficient statistics to gauge the extent of inefficiencies caused by oligopolistic market power. We find that, at a low order, the oligopoly distortions are proportional to the Herfindahl index of industry concentration. At a higher order, distortions also depend on the cubic Hannah-Kay concentration index. Additionally, we show that the welfare loss from resource misallocation is approximately proportional to the difference between the cubic Hannah-Kay index and the square of the Herfindahl index.

Suggested Citation

  • Volker Nocke & Nicolas Schutz, 2025. "Concentration Indices, Welfare Distortions, and Misallocation in Oligopoly," CRC TR 224 Discussion Paper Series crctr224_2025_669, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2025_669
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    References listed on IDEAS

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    1. Gábor Koltay & Szabolcs Lorincz & Tommaso Valletti, 2023. "Concentration and Competition: Evidence From Europe and Implications For Policy1," Journal of Competition Law and Economics, Oxford University Press, vol. 19(3), pages 466-501.
    2. Bulow, Jeremy I & Pfleiderer, Paul, 1983. "A Note on the Effect of Cost Changes on Prices [Measurement of Monopoly Behavior: An Application to the Cigarette Industry]," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 182-185, February.
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    More about this item

    Keywords

    Market power; oligopoly pricing; misallocation; industry concentration; Herfindahl index; Hannah-Kay indices; sufficient statistics;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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