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Oligopoly Power and Allocative Efficiency in U.S. Food and Tobacco Industries

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Most countries throughout the world have competition policies against restraints of trade to prevent significant social welfare and consumer losses from market power (Boner and Krueger 1991). Since Harberger's (1954) seminal work, a considerable volume of research has been conducted to measure allocative efficiency losses from oligopoly power, and the literature continues to grow, showing evidence of continued interest in estimating such losses (e.g., Cowling and Mueller 1978; Willner 1989; Bhuyan and Lopez 1995; Peterson and Connor 1995). Part of this interest is due to the continued reliance by authorities enforcing competition policies on estimates of actual or potential welfare losses as a measure of industry performance (Preston and Connor 1992). Given their economic importance and previous evidence of anticompetitive behavior (Mueller 1983; Connor et al. 1985; Bhuyan and Lopez 1997), the U.S. food and tobacco manufacturing sectors offer a reasonable context in which to analyze allocative efficiency losses from oligopoly power.

As shown by Peterson and Connor (1995) and Bhuyan and Lopez (1995), the welfare losses are critically determined by assumptions about the modes of conduct, marginal costs, and demand elasticities. One serious limitation of previous studies that measured welfare losses in these sectors is that they used industry profitability rates such as price-cost margins to measure market power in order to compute allocative efficiency losses (e.g., Gisser 1982; Willner 1989; Peterson and Connor 1995; Bhuyan and Lopez 1995). Another limitation of past studies is that they assumed constant marginal costs, which likely biased their loss estimates for industries that exhibit either increasing or decreasing returns to scale. Finally, the food-industry demand elasticities used in previous studies (e.g., the elasticities provided by Pagoulatos and Sorensen (1986) based on 1957–1972 data) were external to the data used in the computation of the losses or were simply assumed; Parker and Connor (1979), for example, assumed demand elasticities to be 0.5 for the entire sector and Willner (1989) assumed these elasticities to be 1.0 for all four-digit SIC (standard industrial classification) food industries.
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Document Type: Research Article

Publication date: 01 January 2006

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