Welfare Effects of Entry Into Markets with Switching Costs

Abstract

In many markets, consumers have costs of switching between products that are functionally identical. This note shows that entry of efficient low-cost competitors into these markets may be socially detrimental. In a linear model, entry reduces social welfare (as conventionally defined) in more than half of the relevant parameter space. In a more general model, there is always a range of values of switching costs for which entry reduces welfare, even if the entrant's production costs are lower than the incumbent's. Copyright 1988 by Blackwell Publishing Ltd.

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