IDEAS home Printed from https://ideas.repec.org/p/bon/boncrc/crctr224_2025_669.html

Concentration Indices, Welfare Distortions, and Misallocation in Oligopoly

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp669
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Holmes, Thomas J. & Hsu, Wen-Tai & Lee, Sanghoon, 2014. "Allocative efficiency, mark-ups, and the welfare gains from trade," Journal of International Economics, Elsevier, vol. 94(2), pages 195-206.
    2. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(1), pages 105-163.
    3. 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.
    4. 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.
    5. Carl Shapiro & Ali Yurukoglu, 2026. "Trends in Competition in the United States: What Does the Evidence Show?," Journal of Political Economy Microeconomics, University of Chicago Press, vol. 4(1), pages 316-370.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zarate Vasquez,Roman David, 2022. "Spatial Misallocation,Informality, and Transit Improvements : Evidence from Mexico City," Policy Research Working Paper Series 9990, The World Bank.
    2. Weinberger, Ariel, 2020. "Markups and misallocation with evidence from exchange rate shocks," Journal of Development Economics, Elsevier, vol. 146(C).
    3. Andrew B. Bernard & Emmanuel Dhyne & Glenn Magerman & Kalina Manova & Andreas Moxnes, 2022. "The Origins of Firm Heterogeneity: A Production Network Approach," Journal of Political Economy, University of Chicago Press, vol. 130(7), pages 1765-1804.
    4. Federico Huneeus & Kory Kroft & Kevin Lim, 2021. "Earnings Inequality in Production Networks," NBER Working Papers 28424, National Bureau of Economic Research, Inc.
    5. repec:bge:wpaper:1047 is not listed on IDEAS
    6. Battisti, Michele & Gatto, Massimo Del & Parmeter, Christopher F., 2022. "Skill-biased technical change and labor market inefficiency," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    7. David Rezza Baqaee & Emmanuel Farhi, 2018. "Macroeconomics with Heterogeneous Agents and Input-Output Networks," NBER Working Papers 24684, National Bureau of Economic Research, Inc.
    8. Arnaud Costinot & Iván Werning, 2023. "Robots, Trade, and Luddism: A Sufficient Statistic Approach to Optimal Technology Regulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(5), pages 2261-2291.
    9. Xiwen Bai & Jesús Fernández-Villaverde & Yiliang Li & Ricardo Marto & Francesco Zanetti, 2026. "Shipping to America," Working Papers 2026-021, Federal Reserve Bank of St. Louis.
    10. Matteo Coronese & Davide Luzzati, 2022. "Economic impacts of natural hazards and complexity science: a critical review," LEM Papers Series 2022/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    11. Felipe Saffie & Liliana Varela & Kei-Mu Yi, 2020. "The Micro and Macro Dynamics of Capital Flows," NBER Working Papers 27371, National Bureau of Economic Research, Inc.
    12. Brugués, Felipe & Brugués, Javier & Giambra, Samuele, 2024. "Political connections and misallocation of procurement contracts: Evidence from Ecuador," Journal of Development Economics, Elsevier, vol. 170(C).
    13. Liang, Yan, 2022. "Impact of financial development on outsourcing and aggregate productivity," Journal of Development Economics, Elsevier, vol. 154(C).
    14. Tomás R. Martinez & Thiago Trafane Oliveira Santos, 2024. "Disentangling Brazilian TFP: the role of misallocation in recent economic cycles," Working Papers Series 609, Central Bank of Brazil, Research Department.
    15. Huiyu Li & Chen Lian & Yueran Ma & Emily Martell, 2025. "Borrowing Constraints, Markups, and Misallocation," Working Papers 25-75, Center for Economic Studies, U.S. Census Bureau.
    16. Johannes Boehm, 2020. "The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity," SciencePo Working papers hal-03566762, HAL.
    17. Rodríguez del Valle, Adrián & Fernández-Vázquez, Esteban, 2024. "Analyzing market power of the agricultural industry in Asia," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 652-669.
    18. Jonathan Hambur & Dan Andrews, 2023. "Doing Less, with Less: Capital Misallocation, Investment and the Productivity Slowdown in Australia," RBA Research Discussion Papers rdp2023-03, Reserve Bank of Australia.
    19. Elliott, M. & Jackson, M. O., 2024. "Supply Chain Disruptions, the Structure of Production Networks, and the Impact of Globalization," Cambridge Working Papers in Economics 2424, Faculty of Economics, University of Cambridge.
    20. Jiang, Weijie & Ye, Mengke & Yang, Xingzhe, 2025. "Market access and firms’ energy intensity: Evidence from China’s highway construction," Journal of Asian Economics, Elsevier, vol. 99(C).

    More about this item

    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)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bon:boncrc:crctr224_2025_669. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CRC Office (email available below). General contact details of provider: https://www.crctr224.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.