IDEAS home Printed from https://ideas.repec.org/a/spr/jecrev/v70y2019i3d10.1111_jere.12240.html
   My bibliography  Save this article

The Potential Compensation Principle and Constant Marginal Utility of Income

Author

Listed:
  • Stephen Martin

    (Purdue University)

Abstract

In policy applications, industrial economists are wont to invoke the Kaldor—Hicks potential compensation principle to justify the use of deadweight loss as a measure of the welfare cost of market power. This usage rests on two assumptions. One of these assumptions, that changes in consumer and producer surplus are weighted equally, is well understood. The other assumption, that the marginal utility of income is constant, receives less attention. In a simple model, I show that if there is decreasing marginal utility of income, the use of deadweight loss as an index of market performance rests on shaky ground.

Suggested Citation

  • Stephen Martin, 2019. "The Potential Compensation Principle and Constant Marginal Utility of Income," The Japanese Economic Review, Springer, vol. 70(3), pages 383-393, September.
    • Handle: RePEc:spr:jecrev:v:70:y:2019:i:3:d:10.1111_jere.12240
    DOI: 10.1111/jere.12240
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1111/jere.12240
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1111/jere.12240?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1445-1488, December.
    2. Stephen Martin, 2019. "The Potential Compensation Principle and Constant Marginal Utility of Income," The Japanese Economic Review, Japanese Economic Association, vol. 70(3), pages 383-393, September.
    3. Bruno S. Frey & Alois Stutzer, 2002. "What Can Economists Learn from Happiness Research?," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 402-435, June.
    4. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-797, September.
    5. Baranzini,Mauro L. & Rotondi,Claudia & Scazzieri,Roberto (ed.), 2015. "Resources, Production and Structural Dynamics," Cambridge Books, Cambridge University Press, number 9781107079090.
    6. Amil Petrin, 2002. "Quantifying the Benefits of New Products: The Case of the Minivan," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 705-729, August.
    7. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    8. Stephen Martin, 2019. "The Kaldor–Hicks Potential Compensation Principle and the Constant Marginal Utility of Income," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(3), pages 493-513, November.
    9. Williamson, Oliver E, 1969. "Allocative Efficiency and the Limits of Antitrust," American Economic Review, American Economic Association, vol. 59(2), pages 105-118, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stephen Martin, 2019. "The Potential Compensation Principle and Constant Marginal Utility of Income," The Japanese Economic Review, Springer, vol. 70(3), pages 383-393, September.
    2. Stephen Martin, 2019. "The Kaldor–Hicks Potential Compensation Principle and the Constant Marginal Utility of Income," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(3), pages 493-513, November.
    3. Stephen Martin, 2019. "Economies as an Antitrust Defense: The Welfare Tradeoffs—Introduction to the Special Issue," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(3), pages 327-338, November.
    4. Daniel Bauer & Darius Lakdawalla & Julian Reif, 2018. "Mortality Risk, Insurance, and the Value of Life," NBER Working Papers 25055, National Bureau of Economic Research, Inc.
    5. Glenk, Klaus & Meyerhoff, Jürgen & Colombo, Sergio & Faccioli, Michela, 2024. "Enhancing the face validity of choice experiments: A simple diagnostic check," Ecological Economics, Elsevier, vol. 221(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stephen Martin, 2019. "The Kaldor–Hicks Potential Compensation Principle and the Constant Marginal Utility of Income," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(3), pages 493-513, November.
    2. Stephen Martin, 2019. "Economies as an Antitrust Defense: The Welfare Tradeoffs—Introduction to the Special Issue," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(3), pages 327-338, November.
    3. Tovar, Jorge, 2012. "Consumers’ Welfare and Trade Liberalization: Evidence from the Car Industry in Colombia," World Development, Elsevier, vol. 40(4), pages 808-820.
    4. Patrick Bajari & Jeremy Fox & Stephen Ryan, 2008. "Evaluating wireless carrier consolidation using semiparametric demand estimation," Quantitative Marketing and Economics (QME), Springer, vol. 6(4), pages 299-338, December.
    5. Fève, Frédérique & Fève, Patrick & Florens, Jean-Pierre, 2002. "Attribute Choices and Structural Econometrics of Price Elasticity of Demand," IDEI Working Papers 155, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003.
    6. Aamir Rafique Hashmi & Johannes Van Biesebroeck, 2016. "The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry," The Review of Economics and Statistics, MIT Press, vol. 98(1), pages 192-208, March.
    7. Arlan Brucal & Michael Roberts, 2015. "Can Energy Efficiency Standards Reduce Prices and Improve Quality? Evidence from the US Clothes Washer Market," Working Papers 2015-5, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    8. Christos Genakos & Andreas Lamprinidis & James Walker, 2023. "Evaluating merger effects," CEP Discussion Papers dp1921, Centre for Economic Performance, LSE.
    9. Wong, Maisy, 2010. "The Relationship between Marginal Willingness-to-Pay in the Hedonic and Discrete Choice Models," MPRA Paper 51218, University Library of Munich, Germany.
    10. Ali Hortaçsu & Chad Syverson, 2004. "Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(2), pages 403-456.
    11. Greg M. Allenby & Jeff Brazell & John R. Howell & Peter E. Rossi, 2014. "Valuation of Patented Product Features," Journal of Law and Economics, University of Chicago Press, vol. 57(3), pages 629-663.
    12. Erica L. Groshen & Brian C. Moyer & Ana M. Aizcorbe & Ralph Bradley & David M. Friedman, 2017. "How Government Statistics Adjust for Potential Biases from Quality Change and New Goods in an Age of Digital Technologies: A View from the Trenches," Journal of Economic Perspectives, American Economic Association, vol. 31(2), pages 187-210, Spring.
    13. Tomaso Duso & Annika Herr & Moritz Suppliet, 2014. "The Welfare Impact Of Parallel Imports: A Structural Approach Applied To The German Market For Oral Anti‐Diabetics," Health Economics, John Wiley & Sons, Ltd., vol. 23(9), pages 1036-1057, September.
    14. Dunker, Fabian & Hoderlein, Stefan & Kaido, Hiroaki, 2014. "Nonparametric Identification of Endogenous and Heterogeneous Aggregate Demand Models: Complements, Bundles and the Market Level," Economics Series 307, Institute for Advanced Studies.
    15. Leung, Tin Cheuk, 2015. "Music piracy: Bad for record sales but good for the iPod?," Information Economics and Policy, Elsevier, vol. 31(C), pages 1-12.
    16. Steven T. Berry & Philip A. Haile, 2021. "Foundations of Demand Estimation," Cowles Foundation Discussion Papers 2301, Cowles Foundation for Research in Economics, Yale University.
    17. Sriram Venkataraman & Gregor Matvos & Chad Syverson & Business & Business & Ali Hortacsu, 2010. "Are Consumers Affected by Durable Goods Makers’ Financial Distress? The Case of Auto Manufacturers," 2010 Meeting Papers 836, Society for Economic Dynamics.
    18. Andrew Sweeting, 2007. "Dynamic Product Repositioning in Differentiated Product Markets: The Case of Format Switching in the Commercial Radio Industry," NBER Working Papers 13522, National Bureau of Economic Research, Inc.
    19. Friberg, Richard & Romahn, André, 2015. "Divestiture requirements as a tool for competition policy: A case from the Swedish beer market," International Journal of Industrial Organization, Elsevier, vol. 42(C), pages 1-18.
    20. Rachel Griffith & Lars Nesheim & Martin O'Connell, 2018. "Income effects and the welfare consequences of tax in differentiated product oligopoly," Quantitative Economics, Econometric Society, vol. 9(1), pages 305-341, March.

    More about this item

    Keywords

    D61; L13;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:jecrev:v:70:y:2019:i:3:d:10.1111_jere.12240. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.