On the efficiency of price competition

We study the efficiency of price competition among multi-product firms in differentiated oligopolies. Under a general affine demand model, we show that total surplus (sum of industry profit and consumers’ surplus) under competition is at least 75% of the maximum total surplus achievable by a centralized planner. We also show, in contrast to more stylized oligopoly models, that price collusion can increase total surplus and that competition does not, in general, yield a Pareto efficient trade-off between industry profit and consumers’ surplus. However, the maximum deviation of total surplus from Pareto optimality is less than 10%. These results have implications regarding the effectiveness of current anti-trust regulations.