Market power costs Spain 17% of annual consumer welfare

The study quantifies the welfare costs of market power in Spain's product markets, adapting a dynamic model by Edmond, Midrigan, and Xu (2023).

Using data from the Banco de España's Central Balance Sheet Data Office, the model incorporates heterogeneous firms, variable markups, and endogenous firm entry.

Three primary distortion channels were identified: the aggregate markup (acting as a uniform tax), markup dispersion (leading to inefficient resource allocation), and inefficient firm entry.

For an average markup of 20% above marginal cost, the welfare cost is 16.94% of annual consumer consumption, rising non-linearly to 30.83% at a 25% average markup.

The aggregate markup is the main source of welfare loss, with resource misallocation reducing total factor productivity by 1.3% to 2.9%.

Firm entry distortions have smaller effects.

The paper's findings align with a growing body of literature on declining competition's economic costs.

In the 21st century, competition metrics like price-to-marginal-cost markups have worsened across the US and EU.

This trend negatively impacts economic performance, leading to lower growth, higher prices, and reduced welfare.

Economic research consistently highlights significant welfare detriment from competitive distortions.

Studies estimate substantial total factor productivity gains from addressing excessive markups.

These results underscore competition policy's critical importance, suggesting even modest reductions in market power yield significant economic benefits, especially when initial markups are high.