Welfare losses in models of horizontal And vertical differentiation

We study the percentage of welfare losses (PWL) in models of horizontal and vertical differentiation. In the Hotelling model, we show that PWL depends on the underlying parameters in a non-monotonic way. We also show that PWL can be calculated from market data-locations and market size-except when the market is covered and exhibits maximal product differentiation. PWL can be very large-up to 37.4%-arising from firms located in the wrong places. In the Salop model, PWL can be calculated from market size. PWL may be large-up to 25%-but, in general, smaller than in Hotelling because firms are optimally located here. Finally, under vertical differentiation with two firms, PWL is discontinuous, but can be calculated from market prices and market coverage. In this model PWL is modest, always below 8.33%. JEL classification: D61; L11; L13; L50.