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How Oligopolies May Improve Consumers’ Welfare? R&D Is No Longer Required!

  • Alexander Sidorov
Chapter
Part of the Static & Dynamic Game Theory: Foundations & Applications book series (SDGTFA)

Abstract

The paper studies how the industry concentration affects the Social welfare, which is measured as consumer’s indirect utility. Schumpeterian hypothesis tells that the harmful effect of oligopolization may be offset by positive externalities of concentration, such as innovations in technologies, R&D, etc. This contradicts to traditional neoliberal paradigm, which insists that concentration is always harmful for the end consumers. We study a general equilibrium model with two types of firms and imperfect price competition. Firms of the first type are monopolistic competitors with negligible impact to market statistics, subjected to typical assumptions, e.g., free entry until zero-profit cut-off. Unlike this, the firms of second type assumed to have non-zero impact to market statistics, in particular, to consumer’s income via distribution of non-zero profit across consumers-shareholders. Moreover, these large firms (oligopolies) allow for dependence of profits on their strategic choice, generating so called Ford effect. The first result we present is that in case of CES utility the concentration effect is generically harmful for consumers’ well-being. However, the result may be different for preferences, generating the demand with Variable Elasticity of Substitution (VES). We find the natural assumption on VES utilities, which hold for most of the commonly used classes of utility functions, such as Quadratic, CARA, HARA, etc., which allows to obtain the positive welfare effect, i.e., to justify Schumpeter hypothesis.

Keywords

Bertrand competition Monopolistic competition Additive preferences Ford effect Schumpeter hypothesis 

Notes

Acknowledgements

I owe special thanks to J. F. Thisse and M. Parenti for long hours of useful and discussions in CORE (Louvain-la-Neuve, Belgium). This work was supported by the Russian Foundation for Basic Researches under grant No.18-010-00728 and by the program of fundamental scientific researches of the SB RAS No. I.5.1, Project No. 0314-2016-0018.

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Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  • Alexander Sidorov
    • 1
    • 2
  1. 1.Novosibirsk State UniversityNovosibirskRussia
  2. 2.Sobolev Institute of MathematicsNovosibirskRussia

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