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Entry and Welfare in Search Markets

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Listed:
  • Chen, Yongmin
  • Zhang, Tianle

Abstract

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.

Suggested Citation

  • Chen, Yongmin & Zhang, Tianle, 2013. "Entry and Welfare in Search Markets," MPRA Paper 52241, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:52241
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    File URL: https://mpra.ub.uni-muenchen.de/71040/9/MPRA_paper_71040.pdf
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    References listed on IDEAS

    as
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    3. Cabral, Luis M. B., 2004. "Simultaneous entry and welfare," European Economic Review, Elsevier, vol. 48(5), pages 943-957, October.
    4. Heski Bar-Isaac & Guillermo Caruana & Vicente Cunat, 2012. "Search, Design, and Market Structure," American Economic Review, American Economic Association, vol. 102(2), pages 1140-1160, April.
    5. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Prominence and consumer search," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 209-233.
    6. 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.
    7. Seade, Jesus K, 1980. "On the Effects of Entry," Econometrica, Econometric Society, vol. 48(2), pages 479-489, March.
    8. Simon P. Anderson & Regis Renault, 1999. "Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 719-735, Winter.
    9. 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.
    10. Weitzman, Martin L, 1979. "Optimal Search for the Best Alternative," Econometrica, Econometric Society, vol. 47(3), pages 641-654, May.
    11. 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, May.
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    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. 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.
    15. 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.
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    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.
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    Cited by:

    1. Chen, Yongmin & Zhang, Tianle, 2016. "Intermediaries and Consumer Search," MPRA Paper 76051, University Library of Munich, Germany.

    More about this item

    Keywords

    entry cost; search; product variety; product quality;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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