Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, March 27, 2014

Entry and Welfare in Search Markets

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.

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