Effective Market Power and Welfare Loss

ABSTRACT This paper introduces a straightforward and effective estimation methodology for quantifying firm‐level welfare losses attributable to market power in monopolistic competition markets. Our analysis underscores that welfare losses are primarily contingent on effective market power, expressed as the product of the Lerner index and market share. Furthermore, our study demonstrates that welfare loss computed using the Hicksian measurement is smaller than that obtained through the Marshallian measurement. Finally, we apply this methodology to estimate firm‐level market power and welfare losses in the Chinese carbonated beverage industry.