Product Differentiation and Oligopoly: a Network Approach

74 Pages Posted: 12 Feb 2019 Last revised: 6 Feb 2023

See all articles by Bruno Pellegrino

Bruno Pellegrino

Columbia University - Columbia Business School; University of Chicago - George J. Stigler Center for the Study of the Economy and the State; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

This paper develops a theory of oligopoly and markups in general equilibrium. Firms compete in a network of product market rivalries that emerges endogenously out of the characteristics of the products and services they supply. My model embeds a novel, highly tractable and scalable demand system (GHL) that can be estimated for the universe of public corporations in the USA, using publicly-available data. Using the model, I compute firm-level markups and decompose them into: 1) a new measure of firm productivity that accounts for product quality; 2) a metric of network centrality, which captures the extent of competition from substitute products. I estimate that, in 2019, public corporations produced consumer surplus in excess of 10 US$ trillions (against $3 trillions of profits). Oligopoly lowers total surplus by 11.5% and depresses consumer surplus by 31%. My analysis also suggests that both numbers were significantly lower in the mid-90s (7.9% and 21.5%, respectively). These results should be interpreted with care due to data limitations.

Keywords: Competition, Concentration, General Equilibrium, Market Power, Markups, Mergers, Monopoly, Networks, Oligopoly, Startups, Text Analysis, Welfare

JEL Classification: D2, D4, D6, E2, L1, O4

Suggested Citation

Pellegrino, Bruno, Product Differentiation and Oligopoly: a Network Approach (2019). WRDS Research Paper, Available at SSRN: https://ssrn.com/abstract=3329688 or http://dx.doi.org/10.2139/ssrn.3329688

Bruno Pellegrino (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

University of Chicago - George J. Stigler Center for the Study of the Economy and the State ( email )

Walker Hall
Chicago, IL 60637
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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