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Two extensions of consumer surplus

Author

Listed:
  • Luis C. Corchón

    (Universidad Carlos III de Madrid)

  • Ramón J. Torregrosa

    (Universidad de Salamanca and IME)

Abstract

We study consumer surplus in a single market when (a) there is a lower bound in the consumption of the outside good and (b) the weights in the social welfare function given to consumers and firms are different. We assume quasilinear utility. When the lower bound constraint on the consumption of the outside good is binding, income effects arise in demand. In some cases, Cournot equilibrium output is below equilibrium output without this constraint because the constraint makes demand less elastic. When the weights given to consumers and firms are not identical, social welfare is not necessarily concave and profits might be negative at the unrestricted optimum. We characterize social welfare optimum with a bound on maximum losses in a class of utility functions. We offer a formula to find the percentage of welfare losses due to oligopoly in this case.

Suggested Citation

  • Luis C. Corchón & Ramón J. Torregrosa, 2022. "Two extensions of consumer surplus," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 13(3), pages 557-579, September.
    • Handle: RePEc:spr:series:v:13:y:2022:i:3:d:10.1007_s13209-021-00245-5
    DOI: 10.1007/s13209-021-00245-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Nonnegativity constraint in the outside good; Market power; Social welfare; Oligopoly welfare losses;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D39 - Microeconomics - - Distribution - - - Other
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D69 - Microeconomics - - Welfare Economics - - - Other
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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