Entry and Welfare in Search Markets
We thank two referees for their helpful comments. We also thank Mark Armstrong, Heski Bar-Isaac, Joe Farrell, Maarten Janssen, Louis Kaplow, Andrew Rhodes, David Sappington, Marius Schwartz, Guofu Tan, Mariano Tappata, Ralph Winter, participants in the 4th Workshop on Search (Moscow), the 1st Tsinghua Conference on Theoretical and Behavioral Economics (Beijing), the Fifth Annual Searle Conference on Internet Search and Innovation (Chicago), the Hal White Antitrust Conference (Washington, DC), and in seminars at Academia Sinica, Shanghai University of Finance and Economics, University of Arkansas, University of British Columbia, University of Colorado Boulder, University of South Carolina and Zhejiang University for useful discussions and comments.
The welfare effects of entry 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 free entry is excessive for both consumer welfare and total welfare when entry cost is relatively low, and consumer welfare has an inverted-U relationship with entry cost. We explain why these results may arise naturally in search markets due to the search variety and search quality effects of entry, and discuss their business and policy implications.