Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Friday, June 26, 2020

Product Differentiation, Oligopoly, and Resource Allocation

By: Bruno Pellegrino
Abstract: Industry concentration and profit rates have increased significantly in the United States over the past two decades. There is growing concern that oligopolies are coming to dominate the American economy. I investigate the welfare implications of the consolidation in U.S. industries, introducing a general equilibrium model with oligopolistic competition, differentiated products, and hedonic demand. I take the model to the data for every year between 1997 and 2017, using a data set of bilateral measures of product similarity that covers all publicly traded firms in the United States. The model yields a new metric of concentration√Ębased on network centrality√Ęthat varies by firm. This measure strongly predicts markups, even after narrow industry controls are applied. I estimate that oligopolistic behavior causes a deadweight loss of about 13% of the surplus produced by publicly traded corporations. This loss has increased by over one-third since 1997, as has the share of surplus that accrues to producers. I also show that these trends can be accounted for by the secular decline of IPOs and the dramatic rise in the number of takeovers of venture-capital-backed startups. My findings provide empirical support for the hypothesis that increased consolidation in U.S. industries, particularly in innovative sectors, has resulted in sizable welfare losses to the consumer.

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