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Too Much of a Good Thing? Welfare Consequences of Market Transparency

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  • Yiquan Gu
  • Burkhard Hehenkamp

Abstract

This paper studies welfare consequences of consumer-side market transparency with endogenous entry of firms. Different from most studies, we consider the unique symmetric entry equilibrium, which is in mixed strategies. We identify two effects of market transparency on welfare: a competition effect and a novel market-structure effect. We show, surprisingly, that for almost all demand functions the negative market-structure effect eventually dominates the positive competition effect as the market becomes increasingly transparent. Consumer-side market transparency can therefore be socially excessive even without collusion. The only exception among commonly used demand functions is the set of constant demand functions.

Suggested Citation

  • Yiquan Gu & Burkhard Hehenkamp, 2014. "Too Much of a Good Thing? Welfare Consequences of Market Transparency," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 170(2), pages 225-248, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201406)170:2_225:tmoagt_2.0.tx_2-z
    DOI: 10.1628/093245613X13895979380392
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    References listed on IDEAS

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    1. Boone, Jan & Pottersz, Jan, 2006. "Transparency and prices with imperfect substitutes," Economics Letters, Elsevier, vol. 93(3), pages 398-404, December.
    2. repec:bla:jindec:v:45:y:1997:i:4:p:429-43 is not listed on IDEAS
    3. Zhou, Jidong, 2009. "Prominence and Consumer Search: The Case With Multiple Prominent Firms," MPRA Paper 12554, University Library of Munich, Germany.
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    Cited by:

    1. Jeannette Brosig‐Koch & Burkhard Hehenkamp & Johanna Kokot, 2023. "Who benefits from quality competition in health care? A theory and a laboratory experiment on the relevance of patient characteristics," Health Economics, John Wiley & Sons, Ltd., vol. 32(8), pages 1785-1817, August.
    2. Xu, Lili & Matsumura, Toshihiro, 2023. "Market transparency in a mixed oligopoly," MPRA Paper 118415, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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