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On Welfare Losses Due to Imperfect Competition
Author(s) -
Ritz Robert A.
Publication year - 2014
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/joie.12038
Subject(s) - imperfect competition , welfare , competition (biology) , order (exchange) , market share , business , market power , revenue , industrial organization , compensation (psychology) , imperfect , market structure , perfect information , information asymmetry , economics , monetary economics , microeconomics , market economy , finance , psychoanalysis , psychology , ecology , monopoly , linguistics , philosophy , biology
Corporate managers and executive compensation in many industries place significant emphasis on measures of firm size, such as sales revenue or market share. Such objectives have an important—yet thus far unquantified—impact on market performance. With n symmetric firms, equilibrium welfare losses are of order 1/ n 4 , and thus vanish extremely quickly. Welfare losses are less than 5% for many empirically relevant market structures, despite significant firm asymmetry and industry concentration. They can be estimated using only basic information on market shares. These results also apply to oligopsonistic competition (e.g., for retail bank deposits) and strategic forward trading (e.g., in restructured electricity markets).