IDEAS home Printed from https://ideas.repec.org/a/spr/joecth/v34y2008i1p127-155.html
   My bibliography  Save this article

Expected consumer’s surplus as an approximate welfare measure

Author

Listed:
  • Edward Schlee

Abstract

Willig (1976) argues that the change in consumerís surplus is often a good approximation to the willingness to pay for a price change: if the income elasticity of demand is small, or the price change is small, then the percentage error from using consumerís surplus is small. If the price of a good is random, then the change in (ECS) equals a consumerís willingness to pay for a change in its distribution if and only if its demand is independent of income and the consumer is risk neutral over income gambles. We ask how well the change in ECS approximates the willingness to pay if these conditions fail. We show that the di§erence between the change in ECS and willingness to pay is of higher order than the L1 distance between the distributions if and only if the indirect utility function is additively separable in the price and income. If, however, this knife-edge condition fails, then the percentage error from using ECS can be arbitrarily large for small changes in the price distribution. Moreover, we show that the percentage error can be large even if risk aversion, the goodís income elasticity of demand and its budget share are all small. Thus, the widespread use of expected consumerís surplus as a welfare measure under uncertainty cannot be justified by approximation arguments inspired by those formulated for nonrandom prices.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Edward Schlee, 2008. "Expected consumer’s surplus as an approximate welfare measure," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 34(1), pages 127-155, January.
    • Handle: RePEc:spr:joecth:v:34:y:2008:i:1:p:127-155
    DOI: 10.1007/s00199-007-0210-2
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s00199-007-0210-2
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s00199-007-0210-2?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. Graham, Daniel A, 1981. "Cost-Benefit Analysis under Uncertainty," American Economic Review, American Economic Association, vol. 71(4), pages 715-725, September.
    2. Rogerson, William P, 1980. "Aggregate Expected Consumer Surplus as a Welfare Index with an Application to Price Stabilization," Econometrica, Econometric Society, vol. 48(2), pages 423-436, March.
    3. Lode Li, 1985. "Cournot Oligopoly with Information Sharing," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 521-536, Winter.
    4. Frederick V. Waugh, 1944. "Does the Consumer Benefit from Price Instability?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 58(4), pages 602-614.
    5. Xavier Vives, 1987. "Small Income Effects: A Marshallian Theory of Consumer Surplus and Downward Sloping Demand," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(1), pages 87-103.
    6. Blundell, Richard & Pashardes, Panos & Weber, Guglielmo, 1993. "What Do We Learn About Consumer Demand Patterns from Micro Data?," American Economic Review, American Economic Association, vol. 83(3), pages 570-597, June.
    7. William Novshek & Hugo Sonnenschein, 1982. "Fulfilled Expectations Cournot Duopoly with Information Acquisition and Release," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 214-218, Spring.
    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. Marco de Pinto & Laszlo Goerke, 2022. "Cost uncertainty in an oligopoly with endogenous entry," Bulletin of Economic Research, Wiley Blackwell, vol. 74(4), pages 927-948, October.
    2. Anthony Creane & Kaz Miyagiwa, 2020. "Export versus FDI: Learning through propinquity," International Journal of Economic Theory, The International Society for Economic Theory, vol. 16(4), pages 361-379, December.
    3. Ioan Lucian ALEXA, 2015. "The effects of competition regulations on mobile telecommunication markets," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(2(603), S), pages 303-310, Summer.
    4. repec:agr:journl:v:2(602):y:2015:i:2(602):p:303-310 is not listed on IDEAS
    5. Juliet Elu & Gregory Price, 2015. "Consumer’s Surplus with a Racial Apology? Black Relative to Non-Black Inequality in the Welfare Gains of Fuel-Efficient Cars and Trucks," The Review of Black Political Economy, Springer;National Economic Association, vol. 42(1), pages 135-154, June.
    6. CREANE, Anthony & MIYAGIWA, Kaz, 2015. "Exporting versus foreign direct investment: Learning through propinquity," Discussion paper series 2015-01, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    7. Anthony Creane & Thomas D. Jeitschko, 2016. "Endogenous Entry in Markets with Unobserved Quality," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 494-519, September.
    8. Hayashi, Takashi, 2014. "Consumer surplus analysis under uncertainty: A general equilibrium perspective," Journal of Mathematical Economics, Elsevier, vol. 55(C), pages 154-164.

    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. Hayashi, Takashi, 2014. "Consumer surplus analysis under uncertainty: A general equilibrium perspective," Journal of Mathematical Economics, Elsevier, vol. 55(C), pages 154-164.
    2. Takashi Hayashi, 2019. "What Should Society Maximise Under Uncertainty?," The Japanese Economic Review, Springer, vol. 70(4), pages 446-478, December.
    3. Malueg, David A. & Tsutsui, Shunichi O., 1996. "Duopoly information exchange: The case of unknown slope," International Journal of Industrial Organization, Elsevier, vol. 14(1), pages 119-136.
    4. Sjaak Hurkens, 2014. "Bayesian Nash equilibrium in “linear” Cournot models with private information about costs," International Journal of Economic Theory, The International Society for Economic Theory, vol. 10(2), pages 203-217, June.
    5. Iván Major, 2006. "Why do (or do not) banks share customer information? A comparison of mature private credit markets and markets in transition," CERS-IE WORKING PAPERS 0603, Institute of Economics, Centre for Economic and Regional Studies, revised 24 Apr 2006.
    6. Camille Cornand & Rodolphe Dos Santos Ferreira, 2020. "The social value of information and the competition motive: price versus quantity games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(4), pages 1101-1137, November.
    7. Lagerlof, Johan N.M., 2007. "Insisting on a non-negative price: Oligopoly, uncertainty, welfare, and multiple equilibria," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 861-875, August.
    8. Jianbo Zhang & Zhentang Zhang, 1999. "Asymptotic Efficiency in Stackelberg Markets with Incomplete Information," CIG Working Papers FS IV 99-07, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    9. Goltsman, Maria & Pavlov, Gregory, 2014. "Communication in Cournot oligopoly," Journal of Economic Theory, Elsevier, vol. 153(C), pages 152-176.
    10. Mariana Cunha & Paula Sarmento & Hélder Vasconcelos, 2014. "Uncertain Efficiency Gains and Merger Policy," FEP Working Papers 527, Universidade do Porto, Faculdade de Economia do Porto.
    11. Sinha, Uday Bhanu, 2013. "On R&D information sharing and merger," Economic Modelling, Elsevier, vol. 32(C), pages 369-376.
    12. Jha, Aditya & Fernandes, Kiran & Xiong, Yu & Nie, Jiajia & Agarwal, Neelesh & Tiwari, Manoj K., 2017. "Effects of demand forecast and resource sharing on collaborative new product development in supply chain," International Journal of Production Economics, Elsevier, vol. 193(C), pages 207-221.
    13. Le Pape, Nicolas & Zhao, Kai, 2014. "Horizontal mergers and uncertainty," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-31.
    14. Fabio Tramontana, 2013. "Information exchange in a Cournot duopoly with nonlinear demand function," DEM Working Papers Series 049, University of Pavia, Department of Economics and Management.
    15. Jin, Jim Y., 1995. "Innovation announcement with vertical differentiation," Journal of Economic Behavior & Organization, Elsevier, vol. 28(3), pages 399-408, December.
    16. Amir, Rabah & Jin, Jim Y. & Troege, Michael, 2010. "Robust results on the sharing of firm-specific information: Incentives and welfare effects," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 855-866, September.
    17. Zhongyuan Hao & Li Jiang & Wenli Wang, 2018. "Impacts of sequential acquisition, market competition mode, and confidentiality on information flow," Naval Research Logistics (NRL), John Wiley & Sons, vol. 65(2), pages 135-159, March.
    18. William Novshek & Lynda Thoman, 2006. "Capacity Choice and Duopoly Incentives for Information Sharing," Southern Economic Journal, John Wiley & Sons, vol. 72(4), pages 808-825, April.
    19. Eliane Catilina, 2002. "Information Acquisition in Cournot Markets: An (enhanced) two- Stage Approach," Game Theory and Information 0205005, University Library of Munich, Germany.
    20. Cornand, Camille & Dos Santos Ferreira, Rodolphe, 2020. "Cooperation in a differentiated duopoly when information is dispersed: A beauty contest game with endogenous concern for coordination," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 101-111.

    More about this item

    Keywords

    Expected consumer’s surplus; Welfare; Uncertainty; Local cost-benefit analysis; D6; D8;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D6 - Microeconomics - - Welfare Economics

    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:joecth:v:34:y:2008:i:1:p:127-155. 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.