Template-Type: ReDIF-Paper 1.0
Title: Concentration Indices, Welfare Distortions, and Misallocation in Oligopoly
Author-Name: Volker Nocke
Author-Email: volker.nocke@gmail.com 
Author-Name: Nicolas Schutz
Author-Email: schutz@uni-mannheim.de

Classification-JEL: L13, D43, E20
Keywords: Market power, oligopoly pricing, misallocation, industry concentration, Herfindahl index, Hannah-Kay indices, sufficient statistics

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.

Note: 
Length: 40
Creation-Date: 2025-03
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp669
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2025_669