A Comparison of Oligopoly Welfare Loss Estimates for U.S. Food Manufacturing

Abstract

Capitalizing on theoretical advances in calculating deadweight welfare losses due to imperfect competition, we compare eight empirical estimates for the U.S. food manufacturing industries. The estimates incorporate varying theoretical assumptions about demand, supply, and firm pricing behavior; and utilize various data sources, time periods, and assumptions about the proper competitive benchmark. While the estimates of average allocative losses range widely, there is a high degree of congruence in the rankings of economic losses due to market power. Thus, from the perspective of efficient antitrust enforcement, the newer theoretical oligopoly approaches and the traditional structure-conduct-performance models would target similar industries.The magnitude of static welfare losses associated with oligopoly market power in the U.S. food manufacturing industries is a controversial issue. Parker and Connor (1979), using two structure-conduct-performance (SCP) crosssectional models, were among the first to develop welfare loss estimates for the U.S. food manufacturing industries. Following Harberger, they estimated the deadweight consumer welfare loss to be between 0.16% and 0.45% of the value of 1975 food industry shipments, and total consumer overcharge to range between 7.9% and 11.5% of food shipments. Based on their results, Parker and Connor concluded that antitrust enforcement was justified in some of the U.S. food manufacturing industries. 1While the SCP models provide useful insights, a criticism is that they are based on a priori reasoning rather than being derived from explicit theoretical models. Moreover, the SCP models appeal loosely to oligopoly models of cooperative, cartel-like behavior, thus overlooking the possibility of a range of noncooperative pricing strategies. These criticisms have led researchers to develop welfare loss estimates based on a broader range of oligopoly models that incorporate explicit firm pricing rules (Gisser 1982 and1986; Willner; Dickson and Yu; Clarke and Davies; Willner and St~hl). 2 However, due to differences in assumed firm behavior and oligopoty model parameters, these new estimation algorithms have not provided a convergence in welfare loss estimates. For example, using similar price leadership models, Gisser (1982) concluded that oligopoly welfare losses are insignificant in food manufacturing (approximately 0.5%) while both Willner, and Bhuyan and Lopez arrive at a much larger estimate (4.6%).Accurate estimates of economic losses due to imperfect competition are important for public policy. Antitrust enforcement effort is closely related to such losses, with efficiency criteria (e.g., deadweight welfare loss) given greater weight during some political regimes, while equity concerns (e.g., income transfers) are given greater weight under other political philosophies (Preston and Connor). Given the range of the empirical estimates of welfare losses, we address whether the SCP models and/or new 2 These models have also attempted to relax or test the sensitivity of the ...

Cartel overcharges

“…In large U.S. markets for manufactured products, the deadweight loss is typically one-fifth to one-tenth as large as the overcharge, and the two losses are highly correlated (Peterson and Connor, 1995). Lande and Connor (2012, pp.…”

Optimal Deterrence and Private International Cartels

“…Canadian courts only rarely permit fines to exceed 20% of Canadian affected sales (Low 2004). In Japan, the JFTC is 49 Deadweight loses can be equal to as much as 50% of the overcharge, but empirical studies tend to find that deadweight losses are from 10% to 20% of the overcharge (Peterson and Connor 1995). Legal reasoning for excluding deadweight losses is based on two grounds: that the victims are difficult to identify (e.g., consumers that stopped buying the cartelized product because of the price increase) and that calculating the loss is even more difficult because one must have estimates of own-price elasticity of demand.…”

Concentration and Innovation in the U.S. Food Industries

“…The welfare loss estimates range from less than 0.2% to about 5.2% of gross output in the food processing industry (Peterson and Connor, 1995;Bhuyan and Lopez, 1997). Specifically, we derive welfare loss using a simple specification of the Cournot-Nash deadweight loss (DWL) per unit of sales (Willner and Stahl, 1992).…”