Efectos regionales y distributivos del poder monopolico.

AutorUrzua, Carlos M.

Distributive and Regional Effects of Monopoly Power

Despite the primary concern of economists with the resource allocation effects of market arrangements, political officials are more often concerned with distributive effects. Comanor and Smiley (1975, p. 194).

At first glance it would seem natural to surmise that the welfare effects caused by firms with a significant market power would vary according to the consumers' income, or even according to the regions where the firms sell their products; the latter especially in the case of developing countries, where transportation costs tend to be high and consumers are typically poorly informed. Nevertheless, there have been very few studies that explore in detail the distributional consequences of monopoly power in any economy, whether developed or underdeveloped. Among the general studies known to us are those of Comanor and Smiley (1975), McKenzie (1983), and Creedy and Dixon (1998 and 1999), while Hausman and Sidak (2004) explore the same issue for the particular case of long-distance phone calls. In all those studies the verdict is the same: market power has a significant distributive impact. In the case of Australia, for instance, Creedy and Dixon (1998, p. 285) conclude that "whatever the size of the absolute welfare loss arising from monopoly, there may be a substantial effect on the distribution of welfare".

Our work not only follows those authors in analyzing the distributive impact of firms with a significant market power (this time in the case of Mexico), but it also deals with their regional effects. In order to accomplish this last task, we distinguish between households in urban and rural areas, and calculate afterwards the welfare losses due to market power for each of the thirty two Mexican states. Section I presents the theoretical model to be used to estimate those welfare losses, which is based on the assumption of Cournot-Nash behavioral responses among the dominant firms. Section II details the household expenditure survey that is used in the paper, as well as the markets under study. These are chosen according to two criteria: a presumption, on the part of the Mexican Federal Competition Commission, that there could be market power on the part of the sellers, and the availability of data on, both, households' spending and unit values.

Since the expenditure surveys that are officially made in Mexico are not longitudinal, it is not permissible to regard the reported unit values as prices. Strictly speaking, those values reflect not only commodity prices but also the quality of them. Thus, section III uses the ingenious model of spatial variations proposed by Deaton (1988, 1990) to circumvent that problem. Once the price elasticities of the demand for goods are estimated for both the urban and rural sectors, the distributional and spatial effects on social welfare are estimated in section IV. In the next section, on the other hand, we mention two other approaches that could be used for alternative estimations of the welfare losses due to market power. Section V also mentions the way in which the analysis made in this work could be enlarged to include the case of services provided by firms with market power.

  1. Measuring Welfare Losses Due to Market Power

    In this section we present the theoretical model that is used subsequently to estimate the distributional consequences of market power. Note, from the beginning, that it is assumed that the changes in the social welfare due to market power can be represented by changes in the consumers' surplus. Although it is well known that welfare losses are better estimated using utility-based measures, such as equivalent variations, these measures cannot be calculated here. This is so because, as explained in section III below, the econometric model used in this paper to estimate the own-price elasticities is not a bona fide demand system, since it is not derived from a utility function.

    It is also assumed in this work that the structure of each of the markets considered here is oligopolistic, with the firms competing a la Cournot (monopoly practices would emerge, in particular, as a limit case). More formally, we consider an oligopoly that is constituted by K identical firms, all of them producing the same homogeneous good at a constant marginal cost. Given a particular good, let pm be the price charged to households by the firms with market power, and pc the competitive price that would prevail under perfect competition. As in Creedy and Dixon (1998), we further assume that the demand curve can be approximated by a linear demand function in such a way that the net loss of consumers' surplus, B, can be calculated as:

    B = ([p.sup.m] - [p.sup.c]) ([Q.sup.c] - [Q.sup.m])/2. (1)

    We stress the fact that, as a measure of welfare loss, we are only considering in (1) the consumers' loss that simply "evaporates", and not the profits that accrue to the oligopolistic firms that exercise market power. In section V below we argue that this is the most sensible approach in our context.

    Denoting by [eta] the elasticity of the demand for the good relative to its own price, it follows that

    [eta] = ([Q.sup.m] - [Q.sup.c]) / [Q.sup.m]/([p.sup.m] - [p.sup.c])/[p.sup.m], (2)

    and hence, using (2) in (1), our particular measure of welfare loss can be rewritten as:

    B = [([p.sup.m] - [p.sup.c]/[p.sup.m]).sup.2] [p.sup.m] [Q.sup.m] (-[eta])/2. (3)

    In order to calculate (3) we require not only an estimate of the elasticity, but also of the amount spent on the good (which can be obtained from a survey) and the estimated increase in relative prices due to market power (which depends on the particular industrial structure prevailing in the market). As noted earlier, we assume that in each market there are K identical firms with constant marginal costs, c, behaving according to Cournot's hypothesis. Thus, it is not difficult to show that the Cournot-Nash quantity equilibrium is such that:

    [p.sup.m] (1 + 1/K[eta]) = c, (4)

    so that, since [p.sup.c] = c,

    [p.sup.m] - [p.sup.c]/[p.sup.c] = - 1/K[eta]. (5)

    Finally, our measure of welfare loss given in (3) can now be rewritten using (5) as

    B = - [p.sup.m] [Q.sup.m]/2[K.sup.2][eta]. (6)

    The appeal of this measure is evident: it just requires an estimate of the price elasticity, the spending on each good and the number of oligopolistic firms in the market (one in the case of a monopoly). Also note that one has to add the restriction [eta]

  2. Data and the Markets under Study

    The household income and expenditure survey to be used here is known in Mexico as the Encuesta nacional de ingresos y gastos de los hogares, ENIGH, for short. The most recent ENIGH that was available at the moment of this writing was made in August-November 2006 (INEGI, 2007). The sample consisted of 20,875 housing units, and it was designed to provide reliable estimates at the national level, as well as at the urban and rural levels (the urban sector consists of all localities with 2,500 or more inhabitants, and the rural sector of the rest); furthermore, the 2006 survey was also representative for some, but not...

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