Conduct, Structure and Relative Welfare Losses in Quantity-Setting Duopoly
Since the pioneering study of Harberger, monopoly welfare loss has received much attention in the literature. However, no attempt has been made explicitly to incorporate oligopolistic interaction. In this paper we postulate a specific social welfare function and solve directly for the level of welfare (net surplus) under various duopoly equilibria. Our approach departs from the long-standing tradition in industrial economics in which performance (profit) is explained by structure (concentration). We look directly at welfare, and concentration is found jointly with prices, outputs and profits as part of a solution determined by preferences, behaviour (conduct) and technology. Numerical analysis and computer graphics are employed to generate estimates of welfare loss under each pligopoly solution concept, relative to the social optimum, across plausible ranges of underlying cost and demand parameters.
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