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Endogenous Market Structures and Welfare - Intertic

Endogenous Market Structures and Welfare - Intertic

Endogenous Market Structures and Welfare -

Endogenous Market Structures and Welfare Federico Etro 1 First version: March 2012 Current version: December 2012 Key words: Endogenous market structures, leaders, welfare JEL Codes: L1, L2, L4 Abstract I characterize microfounded endogenous market structures with Bertrand and Cournot competition and perform welfare analysis generalizing the Mankiw-Whinston condition for excess entry. I reconsider also the impact of the strategies adopted by a market leader on welfare: the neutrality of consumer surplus holds only when utility is homothetic and, under quantity competition, aggressive (accommodating) leaders increase consumer surplus if the elasticity of utility is decreasing (increasing) in consumption. This has a number of policy implications concerning strategic investments, vertical contracts, bundling, mergers and more. 1 University of Venice, Ca’ Foscari, Department of Economics. I am grateful to Alberto Bucci, Sergei Izmalkov, Sergey Kokovin, Dmitry Krutikov, Jacques Thisse, Evgeny Zhelobodko and participants to seminars at the Higher School of Economics in St. Petersburg and the New School of Economics in Moscow for useful comments. Email: federico.etro@unive.it. Address: Dept. of Economics, University of Venice Ca’ Foscari, Sestiere Cannaregio, 30121, Fond.ta S.Giobbe 873, Venice. Tel: +39-0412349172. Fax: +39-0412349176 1

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