Although reducing concentration in the markets of mobile telecommunication and corn products would lead to a significant reduction in poverty, the impact of lower concentration on inequality reduction would be more moderate. These results are due to the relative shares of consumption across the income distribution. In particular, the share of expenditure allocated to mobile communication services is relatively consistent across income deciles.

# **5.4. Limitations**

Although the WELCOM tool is a useful application of simulations for ex ante distributional analysis and policy discussions, the methodology is not without limitations. First, the tool follows a partial equilibrium approach that relies on the expenditure of households on the products expected to be affected by the policy reform. In other words, it only captures the first-order effects of competition on welfare. This approach might be adequate for final goods that are not used intensively as intermediate products or inputs in the production of other goods. In contrast, this assumption could pose limitations when analyzing goods that are used as inputs in the elaboration of other products, in which case, alternative approaches that consider the different interactions of the goods with the rest of the economy (such as an input-output matrix) might be more appropriate.

In its current version, WELCOM focuses on the welfare effects of the policies promoting competition through the role of households as consumers. However, the members of a typical household play more than one role in the economy: they may be employees, employers, or firm owners, as well as consumers. Moreover, the current version of WELCOM only analyzes the impacts through the price channel, potentially missing other impacts in alternative channels (for example, labor markets or the value of assets) that could either reinforce or offset the welfare impacts of the policies under study in certain industries.

It is critical to understand that the consequences of product market concentration are not always confined to the product market and may impact other, related markets. Ultimately, an analysis of the ways reforms to promote competition affect household welfare would need to consider the direct effects through price and other channels, such as wages, employment, and profit shares, to determine the distributional effects of competition through its impact on three overlapping groups of economic agents, that is, consumers, workers, and capital owners. The competition conditions among firms affect the welfare of households in their role as consumers through changes in the prices, quality, and diversity of alternatives available for purchase (Atkin et al. 2016; Begazo and Nyman 2016). Although desirable, changes in the quality and diversity of products, as well as the effects of new consumers that were previously priced out, are not within the scope of analysis of WELCOM. The first is due to the use of household surveys, which do not account for the quality of the products consumed. An appropriate method is currently in development in an updated version of the tool and will be incorporating potential welfare gains in the extensive margin of the products of interest.

It is also important to highlight other channels, such as wages, employment, profit, and capital income. For instance, competition can affect household welfare through labor market adjustments induced by competition and the resulting effect on nominal wages, the number and composition of firms demanding labor (due to the potential entry or exit of firms), and labor’s bargaining power or the presence of oligopsonies in factor markets such as labor (CEA 2016b). Moreover, competition affects 22