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Product Differentiation and Oligopoly: A Network Approach

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  • Bruno Pellegrino

Abstract

This paper develops a theory of oligopoly and markups in general equilibrium. Firms compete in a network of product market rivalries that emerges endogenously out of the characteristics of the products and services they supply. My model embeds a novel, highly tractable and scalable demand system (GHL) that can be estimated for the universe of public corporations in the USA, using publicly-available data. Using the model, I compute firm-level markups and decompose them into: 1) a new measure of firm productivity that accounts for product quality; 2) a metric of network centrality, which captures the extent of competition from substitute products. I estimate that, in 2019, public corporations produced consumer surplus in excess of 10 US$ trillions (against $3 trillions of profits). Oligopoly lowers total surplus by 11.5% and depresses consumer surplus by 31%. My analysis also suggests that both numbers were significantly lower in the mid-90s (7.9% and 21.5%, respectively). These results should be interpreted with care due to data limitations.

Suggested Citation

  • Bruno Pellegrino, 2023. "Product Differentiation and Oligopoly: A Network Approach," CESifo Working Paper Series 10244, CESifo.
  • Handle: RePEc:ces:ceswps:_10244
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp10244.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ha, Sangeun & Ma, Fangyuan & Žaldokas, Alminas, 2024. "Motivating collusion," Journal of Financial Economics, Elsevier, vol. 154(C).

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    More about this item

    Keywords

    competition; concentration; general equilibrium; market power; markups; mergers; monopoly; networks; oligopoly; text analysis;
    All these keywords.

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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