Managerial Firms, Entry, and Switching Costs

Quan Dong, Juan Bárcena-Ruiz and Joana Díaz-Benito

International Journal of the Economics of Business, 2017, vol. 24, issue 3, 315-327

Abstract: Empirical evidence shows that switching costs are important in many industries. We analyze the welfare effects of entry into markets with switching costs when firms can be run by managers and the entrant may be partially foreign-owned. We find that with profit-maximizing firms, the welfare effect of entry depends crucially on the ownership of the entrant firm. We also show that entry is less likely with managerial firms than it is with profit-maximizing firms. In the latter case, entry always reduces welfare if the share of the entrant firm owned by foreign investors is high. However, with managerial firms, entry always increases welfare.

Date: 2017
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DOI: 10.1080/13571516.2017.1309750

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