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Computing welfare losses from data under imperfect competition with heterogeneous goods

  • Zudenkova, Galina
  • Corchón, Luis C.

We study the percentage of welfare losses (PWL) yielded by imperfect competition under product differentiation. When demand is linear, if prices, outputs, costs and the number of firms can be observed, PWL is arbitrary in both Cournot and Bertrand equilibria. If in addition, the elasticity of demand (resp. cross elasticity of demand) is known, we can calculate PWL in Cournot (resp. Bertrand) equilibrium. When demand is isoelastic and there are many firms, PWL can be computed from prices, outputs, costs and the number of .rms. In all these cases we find that price-marginal cost margins and demand elasticities may influence PWL in a counterintuitive way. We also provide conditions under which PWL increases or decreases with concentration.

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Paper provided by Universidad Carlos III de Madrid. Departamento de Economía in its series UC3M Working papers. Economics with number we082616.

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Date of creation: May 2008
Handle: RePEc:cte:werepe:we082616
Contact details of provider: Web page: http://www.eco.uc3m.es/

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  1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Oxford University Press, vol. 43(2), pages 217-235.
  2. Corchón, Luis C. & Zudenkova, Galina, 2009. "Computing welfare losses from data under imperfect competition with heterogeneous goods," International Journal of Industrial Organization, Elsevier, vol. 27(6), pages 646-654, November.
  3. 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.
  4. Hackner, Jonas, 2000. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Journal of Economic Theory, Elsevier, vol. 93(2), pages 233-239, August.
  5. Judy Hsu & X. Wang, 2005. "On Welfare under Cournot and Bertrand Competition in Differentiated Oligopolies," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 27(2), pages 185-191, 09.
  6. A. P. Lerner, 1934. "The Concept of Monopoly and the Measurement of Monopoly Power," Review of Economic Studies, Oxford University Press, vol. 1(3), pages 157-175.
  7. 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.
  8. Simon P. Anderson & Regis Renault, 2001. "Effciency and surplus bounds in Cournot competition," Virginia Economics Online Papers 353, University of Virginia, Department of Economics.
  9. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  10. Daughety, Andrew F, 1990. "Beneficial Concentration," American Economic Review, American Economic Association, vol. 80(5), pages 1231-37, December.
  11. Amir, Rabah & Jin, Jim Y., 2001. "Cournot and Bertrand equilibria compared: substitutability, complementarity and concavity," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 303-317, March.
  12. Malcolm Coate, 2005. "Empirical Analysis of Merger Enforcement Under the 1992 Merger Guidelines," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 27(4), pages 279-301, December.
  13. Corchón, Luis C., 2006. "Welfare losses under cournot competition," UC3M Working papers. Economics we063910, Universidad Carlos III de Madrid. Departamento de Economía.
  14. Lahiri, Sajal & Ono, Yoshiyasu, 1988. "Helping Minor Firms Reduces Welfare," Economic Journal, Royal Economic Society, vol. 98(393), pages 1199-1202, December.
  15. Cowling, Keith & Mueller, Dennis C, 1978. "The Social Costs of Monopoly Power," Economic Journal, Royal Economic Society, vol. 88(352), pages 727-48, December.
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