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Welfare Effects of Entry into Markets with Switching Costs

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  • Klemperer, Paul D

Abstract

In many markets, consumers have costs of switching between products that are functionally identical. This note shows that entry of efficient low-cost competitors into these markets may be socially detrimental. In a linear model, entry reduces social welfare (as conventionally defined) in more than half of the relevant parameter space. In a more general model, there is always a range of values of switching costs for which entry reduces welfare, even if the entrant's production costs are lower than the incumbent's. Copyright 1988 by Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Industrial Economics.

Volume (Year): 37 (1988)
Issue (Month): 2 (December)
Pages: 159-65

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Handle: RePEc:bla:jindec:v:37:y:1988:i:2:p:159-65

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-1821

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Cited by:
  1. Andrzej Baniak & Peter Grajzl, 2012. "Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects," CEU Working Papers 2012_4, Department of Economics, Central European University, revised 10 Apr 2012.
  2. A. Jorge Padilla, 1991. "Consumer switching costs: a survey," Investigaciones Economicas, FundaciĆ³n SEPI, vol. 15(3), pages 485-504, September.
  3. repec:ebl:ecbull:v:12:y:2004:i:5:p:1-7 is not listed on IDEAS
  4. Alderighi, Marco, 2007. "The role of buying consortia among SMEs in the electricity market in Italy," Energy Policy, Elsevier, vol. 35(6), pages 3463-3472, June.
  5. repec:ebl:ecbull:v:12:y:2007:i:33:p:1-6 is not listed on IDEAS
  6. Zhang, Yahua & Round, David K., 2011. "Price wars and price collusion in China's airline markets," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 361-372, July.
  7. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics, Springer, vol. 8(2), pages 167-205, June.
  8. Arijit Mukherjee & Chiranjib Neogi, . "Vertical technology transfer and the implications of patent protection," Discussion Papers 09/05, University of Nottingham, School of Economics.
  9. Arijit Mukherjee, 2007. "Entry in a Stackelberg perfect equilibrium," Economics Bulletin, AccessEcon, vol. 12(33), pages 1-6.
  10. Arijit Mukherjee & Udo Broll & Soma Mukherjee, . "The welfare effects of entry: the role of the input market," Discussion Papers 08/12, University of Nottingham, School of Economics.
  11. Elisabetta Ottoz & Franco Cugno, 2004. "The independent invention defence in a Cournot duopoly model," Economics Bulletin, AccessEcon, vol. 12(5), pages 1-7.
  12. Marjit, Sugata & Mukherjee, Arijit, 2013. "Foreign competition and social efficiency of entry," Economic Modelling, Elsevier, vol. 32(C), pages 108-112.
  13. Gandomi, A. & Zolfaghari, S., 2013. "Profitability of loyalty reward programs: An analytical investigation," Omega, Elsevier, vol. 41(4), pages 797-807.
  14. Elzinga, Kenneth G. & Mills, David E., 1999. "Price wars triggered by entry," International Journal of Industrial Organization, Elsevier, vol. 17(2), pages 179-198, February.

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