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Market Structure, Concentration Indices and Welfare Cost

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Abstract

This paper revisited the analytics of the welfare significance of market imperfections using the industry concentration index. It reopened the issue of how best to measure the concentration index. Specifically, it developed a new market concentration index based on the Hirschman- Herfindahl concentration index that preserves all its known advantages as a full information industry concentration index. It also improved on its usefulness and applicability. In developing the new index the paper reviewed the development of the analytical principles and methodologies for the empirical measurement of the welfare or social cost of monopoly (market imperfections). In particular, it reviewed Cowling-Mueller (1981) extensively because the analytical framework they prescribed for the measurement of the welfare cost of oligopoly is misconceived and misleading. The new index is of great usefulness and wide applicability and generalizes the welfare loss function to the entire market structure spectrum.

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