Welfare Effects of Entry into Markets with Switching Costs

Paul Klemperer

Journal of Industrial Economics, 1988, vol. 37, issue 2, 159-65

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.

Date: 1988
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