Product Differentiation and Oligopoly: a Network Approach
61 Pages Posted: 12 Feb 2019 Last revised: 9 Sep 2020
Date Written: 2019
Industry concentration and corporate profit rates have increased, in the United States, over the past two decades. This paper investigates the welfare implications of economic activity concentrating within a few firms that hold market power. I develop a general equilibrium model that features granular firms that compete in a network game of oligopoly, alongside a continuum of atomistic firms with free entry. To capture the degree of product differentiation among the oligopolists, I introduce a Generalized Hedonic-Linear (GHL) demand system. I show how to identify this demand system using a publicly-available dataset that measures product similarity among all public corporations in the US. Using my model, I estimate a large deadweight loss from oligopolistic behavior, equal to 11% of the total surplus produced by public firms. This loss would increase to 20% if all these firms were allowed to collude. The distributional effects of oligopoly are quantitatively important as well: under perfect competition, consumer surplus would double with respect to the oligopolistic equilibrium. I also estimate that the deadweight loss has increased by at least 2.5 percentage points since 1997. The share of surplus that accrues to producers as profits also has increased. Finally, I show how the dramatic rise in startups' proclivity to sell off to incumbents (rather than go public) may have contributed to these trends.
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: Suggested Citation