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Computing welfare losses from data under imperfect competition with heterogeneous goods

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URI: https://hdl.handle.net/10016/9065
ISSN: 0167-7187
DOI: 10.1016/j.ijindorg.2009.04.002
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computing_corchon_IJIO_2009_ps.pdf (409.84 KB)
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2009-11
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Elsevier
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Abstract
We study the percentage of welfare losses (PWL) yielded by imperfect competition under product differentiation. When demand is linear, even 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 a 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 firms. 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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Welfare losses, Product differentiation, Cournot equilibrium, Bertrand equilibrium, Spence model
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International Journal of Industrial Organization, 2009, 27, 6. p. 646-654
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