Consumer Welfare Loss Estimates for Differentiated Food Product Markets

Abstract

The magnitude of static welfare losses associated with oligopoly market power in the U.S. food manufacturing industries is controversial. Having accurate estimates of these losses is important for the allocation of antitrust enforcement efforts. Parker and Connor, using two structure-conduct-performance (SCP) crosssectional models,' were among the first to estimate the magnitude of welfare losses for the U.S. food manufacturing industries. They estimated the deadweight consumer welfare loss (DWL) to be between 0.16 and 0.45 percent of the value of 1975 food industry shipments, and total consumer overcharge (the sum of the deadweight loss triangle plus the income transfer) to range between 7.9 percent and 11.5 percent of food shipments. While the SCP models have provided useful insights, a criticism of these models is that they are not derived from explicit theoretical models (Schmalensee). This criticism led researchers to develop new welfare loss formulas based on oligopoly models that incorporate explicit firm pricing rules (Dickson and Yu; Willner; Willner and Stahl). Until the late 1980s, mathematical tractability confined these models to considering only homogeneous goods. Connor and Peterson (1994) showed that the average deadweight loss estimate for U.S. food manufacturing using various oligopoly models ranged