Thursday, March 27, 2014
Yongmin Chen, University of Colorado at Boulder and Tianle Zhang, Lingnan University address Entry and Welfare in Search Markets.
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 bene ts consumers, we nd 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 e¤ects of entry, and discuss their business and policy implications.