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Entry and Welfare in Search Markets

  • Chen, Yongmin
  • Zhang, Tianle

The 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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File URL: https://mpra.ub.uni-muenchen.de/71040/9/MPRA_paper_71040.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52241.

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Date of creation: 14 Dec 2013
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Handle: RePEc:pra:mprapa:52241
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  1. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  2. Asher Wolinsky, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 493-511.
  3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
  4. Mark Armstrong & John Vickers & Jidong Zhou, 2008. "Prominence and Consumer Search," Economics Series Working Papers 379, University of Oxford, Department of Economics.
  5. Weitzman, Martin L, 1979. "Optimal Search for the Best Alternative," Econometrica, Econometric Society, vol. 47(3), pages 641-54, May.
  6. Rabah Amir & Val E. Lambson, 2000. "On the Effects of Entry in Cournot Markets," Review of Economic Studies, Oxford University Press, vol. 67(2), pages 235-254.
  7. Yongmin Chen & Michael H. Riordan, 2008. "Price-increasing competition," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1042-1058.
  8. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  9. Susan Athey & Glenn Ellison, 2009. "Position Auctions with Consumer Search," NBER Working Papers 15253, National Bureau of Economic Research, Inc.
  10. Marco A. Haan & José L. Moraga‐González, 2011. "Advertising for Attention in a Consumer Search Model," Economic Journal, Royal Economic Society, vol. 121(552), pages 552-579, 05.
  11. Anderson, S.P. & Renault, R., 1997. "Pricing, Product Diversity and Search Costs: A Bertrand-Chamberlin-Diamond Model," Papers 97.481, Toulouse - GREMAQ.
  12. Heski Bar-Isaac & Guillermo Caruana & Vicente Cuñat, 2009. "Search, Design and Market Structure," Working Papers 09-17, NET Institute, revised Sep 2009.
  13. Maarten C. W. Janssen & José Luis Moraga-González, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1089-1118.
  14. Cabral, Luis M. B., 2004. "Simultaneous entry and welfare," European Economic Review, Elsevier, vol. 48(5), pages 943-957, October.
  15. Seade, Jesus K, 1980. "On the Effects of Entry," Econometrica, Econometric Society, vol. 48(2), pages 479-89, March.
  16. Mark A. Satterthwaite, 1979. "Consumer Information, Equilibrium Industry Price, and the Number of Sellers," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 483-502, Autumn.
  17. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
  18. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
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