Entry and Welfare in Search Markets
AbstractThe effects of entry on consumer and total welfare are studied in a model of consumer search. Potential entrants differ in quality, with high-quality sellers being more likely to meet consumer needs. Contrary to the standard view in economics that more entry benefits consumers, we find that consumer welfare has an inverted-U relationship with entry cost, and free entry is excessive for both consumer and total welfare when entry cost is relatively low. We explain why these results may arise naturally in search markets due to the variety and quality effects of entry, and discuss their business and policy implications.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 52241.
Date of creation: 14 Dec 2013
Date of revision:
entry cost; search; product variety; product quality;
Find related papers by JEL classification:
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-29 (All new papers)
- NEP-COM-2013-12-29 (Industrial Competition)
- NEP-MKT-2013-12-29 (Marketing)
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