The analysis is also based on information from the Mexican Federal Competition Commission and assumes that the mobile telecommunication market behaves as an oligopoly (OLI-NASH) and that corn markets mimic a partial collusive oligopoly (PCO). Then, using WELCOM, data from ENIGH, and assumed parameters of these two markets from recent literature, the analysis shows that expanding competition from 4 to 12 firms in the mobile telecommunications industry and reducing the market share of the dominant oligopoly in corn products from 31.2 percent to 7.8 percent would produce a combined reduction of 0.8 percentage points in the poverty rate and of 0.31 points in the Gini coefficient. The contribution of each market to poverty reduction would be: 0.11 percentage points with mobile telecommunication and 0.66 percentage points with corn products.<sup>11</sup> The paper is organized as follows. Section 2 briefly describes the theoretical models adapted and included in the simulation approach. It also describes the options available for estimating the effects on household welfare. Section 3 introduces the simulation technique and describes the data requirements. Section 4 presents the rationale of selecting Mexico as a relevant case study, as well as some stylized facts on the degree of concentration of the industries selected, that is, mobile telecommunication and corn products, and some descriptive statistics, including data on household expenditures on categories linked to the selected markets. Section 5 discusses the parameters used in the analysis, the main results, and the limitations of the analysis. Section 6 concludes and lays out potential extensions for the simulation approach.

# **2. Conceptual framework**

This section presents an overview of some of the early theoretical approaches to studying the distributional effects of market concentration. Then, it discusses three main theoretical models used in WELCOM to simulate alternative market conditions: (a) the monopolistic structure, (b) the oligopolistic structure (Nash equilibrium), and (c) the PCO structure. These models are the theoretical foundations of the simulation method presented and implemented in the following sections.

# **2.1. Theoretical model**

Stigler (1964) and Dixit and Stern (1982) are among the authors of the first theoretical papers studying the distributional effects of market concentration. The seminal paper by Stigler (1964) proposes a model that focuses on the factors that influence oligopolistic behavior in determining prices above the market threshold. To test empirically his theories on the positive relationship between market concentration and prices, Stigler (1964) started the trend of using the Herfindahl-Hirschman index in econometric analysis. He found that small buyers are more likely to pay higher prices under market concentration than bigger buyers and that buyer diversity ultimately fosters competition. Dixit and Stern (1982) developed an oligopolistic market framework that supported the empirical assessment of welfare under imperfect market conditions. They explored welfare losses in a specific industry with a homogenous good and a small number of firms and noted several distributional issues associated with this framework. For example, if a dollar gain to consumers is perceived as more valuable than a dollar

> 11 The impacts on welfare are not linear. The aggregate effect is thus not necessarily equal to the sum of the individual impacts.

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