Concentration Indices, Welfare Distortions, and Misallocation in Oligopoly

Volker Nocke () and Nicolas Schutz

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We derive closed-form expressions for the welfare distortions arising from oligopolis tic market power. Our analysis covers competition among multiproduct firms facing constant elasticity of substitution (CES) or multinomial logit demand. The derived formulas rely solely on observed (oligopolistic) firm-level market shares and, under CES demand, the elasticity of substitution. Under CES demand, we fully character ize resource misallocation and extend the analysis to general oligopolistic equilibrium, decomposing welfare losses into within- and between-industry components. Taylor ap proximations connect these losses to standard concentration indices: within-industry misallocation is proportional to the difference between the cubic Hannah–Kay index and the squared Herfindahl index, while between-industry misallocation is proportional to the variance of the Herfindahl index across industries.

Keywords: Market power; oligopoly pricing; misallocation; industry concentration; Herfindahl index; Hannah-Kay indices; sufficient statistics (search for similar items in EconPapers)
JEL-codes: D43 D61 E23 L13 (search for similar items in EconPapers)
Pages: 73
Date: 2025-03, Revised 2026-10
New Economics Papers: this item is included in nep-com, nep-eur, nep-gth and nep-reg
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Related works:
Working Paper: Concentration Indices, Welfare Distortions, and Misallocation in Oligopoly (2025)
Working Paper: Concentration Indices, Welfare Distortions, and Misallocation in Oligopoly (2025)
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