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Welfare losses under cournot competition

  • Luis C. Corchon

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.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we063910.

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Date of creation: Jun 2006
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Handle: RePEc:cte:werepe:we063910
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  1. Daughety, Andrew F, 1990. "Beneficial Concentration," American Economic Review, American Economic Association, vol. 80(5), pages 1231-37, December.
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  4. Farrell, J. & Shapiro, C., 1988. "Horizontal Mergers: An Equilibrium Analysis," Papers 17, Princeton, Woodrow Wilson School - Discussion Paper.
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  7. Javier M. López-Cuñat, 1999. "One-stage and two-stage entry Cournot equilibria," Investigaciones Economicas, Fundación SEPI, vol. 23(1), pages 115-128, January.
  8. Suzumura, Kotaro & Kiyono, Kazuharu, 1987. "Entry Barriers and Economic Welfare," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 157-67, January.
  9. Simon P. Anderson & Regis Renault, 2001. "Effciency and surplus bounds in Cournot competition," Virginia Economics Online Papers 353, University of Virginia, Department of Economics.
  10. Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
  11. Fraysse, J. & Moreaux, M., 1981. "Cournot equilibrium in large markets under increasing returns," Economics Letters, Elsevier, vol. 8(3), pages 217-220.
  12. Novshek, William, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 473-86, April.
  13. Yarrow, G K, 1985. "Welfare Losses in Oligopoly and Monopolistic Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 515-29, June.
  14. 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.
  15. 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.
  16. 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 525-45, October.
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