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 study welfare distortions in a multiproduct-firm pricing game with constant elasticity of substitution (CES) or multinomial logit (MNL) demand. Using approximations both around small market shares and around monopolistic competition conduct, we identify sufficient statistics to gauge the extent of inefficiencies caused by oligopolistic market power. We find that, at a low order, the oligopoly distortions are proportional to the Herfindahl index of industry concentration. At a higher order, distortions also depend on the cubic Hannah-Kay concentration index. Additionally, we show that the welfare loss from resource misallocation is approximately proportional to the difference between the cubic Hannah-Kay index and the square of the Herfindahl index.

Keywords: Market power; oligopoly pricing; misallocation; industry concentration; Herfindahl index; Hannah-Kay indices; sufficient statistics (search for similar items in EconPapers)
JEL-codes: D43 E20 L13 (search for similar items in EconPapers)
Pages: 40
Date: 2025-03
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