Worst-Case Bounds on R&D and Pricing Distortions: Theory and Disturbing Conclusions if Consumer Values Follow the World Income

Michael Kremer

No 13241, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We prove that, for general demand and cost conditions and market structures, the fraction of first best surplus that a monopolist is unable to extract in a market provides a tight upper bound on the relative distortions arising from firms’ equilibrium decisions at all margins (entry and pricing). Continuing with this worst-case perspective, we show that a symmetrically truncated Zipf (STRZ) distribution of consumer values generates the lowest producer surplus among those with a given mean and maximum value. This allows us to relate potential deadweight loss from all margins in a market to the Zipf-similarity of its demand curve. The STRZ distribution also bounds deadweight loss at just the pricing margin. We leverage existing results from industrial organization (e.g., on demand curvature) and statistics (e.g., on the relation between means and medians) to bound producer surplus in an array of important special cases. Calibrations based on the world distribution of income generate extremely Zipf-similar demand curves, with disturbing consequences for potential deadweight loss in global markets. We gauge the extent to which various policies—such as progressive taxation or price discrimination—can ameliorate potential deadweight loss.

Keywords: Firm behavior; Monopoly; Innovation and invention; Incentives for invention; Pricing; Market structure (search for similar items in EconPapers)
JEL-codes: D21 D42 L11 O31 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-com
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://cepr.org/publications/DP13241 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:13241

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP13241

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().