Endogenous Market Structures and Welfare
University of Venice at Ca’ Foscari Working Paper No. 12/WP/2012
19 Pages Posted: 10 Jul 2012
Date Written: July 1, 2012
I characterize microfounded endogenous market structures with Bertrand and Cournot competition and perform welfare analysis generalizing the Mankiw-Whinston condition for excess entry. The impact of market leaders on welfare is reconsidered, with a number of policy implications about strategic investments, vertical contracts, bundling, mergers and more. The neutrality of consumer surplus holds only when utility is homothetic. Under quantity competition, aggressive (accommodating) leaders increase consumer surplus if the elasticity of utility is decreasing (increasing) in consumption. This provides general rules to evaluate mergers and abuse of dominance issues in antitrust policy.
Keywords: endogenous entry, oligopoly, welfare
JEL Classification: L1
Suggested Citation: Suggested Citation