Entry Timing in the Face of Switching Costs and its Welfare Effects: Evidence from Same-Day Grocery Delivery Platforms

Abstract

The online grocery market has seen significant entry over the last five years by firms with different business models. Most firms offer subscriptions, and, in the data, consumers rarely switch between them. I find that switching costs significantly affect consumer platform choice, suggesting potential for future exercise of market power. I estimate the welfare impact of the acquisition of a national grocery chain by of a major online retailer and highlight the role played by this feature of demand and by delivery cost structures. I model competition between two large platforms. The first is the major online retailer engaging in the merger. The rival is an independent platform with low entry costs. The platforms compete in a dynamic entry game, and two opposing forces influence entry timing. I find that firms chase a first-mover advantage resulting from consumer lock-in at the expense of higher entry costs, leading to significant costs of early entry. I estimate that, before the acquisition, the major online retailer had very large entry costs. The acquisition reduced this cost, posing a competitive threat to the rival. Consumer lock-in then contributed to raising the stakes of early entry for both firms, accelerating entry across new markets and generating over \$ 800 M in welfare gains to consumers due to earlier entry. Further, I find that a merger between the two platforms, resulting in a monopoly, would delay entry significantly. These results show that strategic competition in entry timing plays an important role in mergers' welfare effect.