Service costs and economic welfare

Abstract

This study examines the effects of service cost reduction on a “service-with-location” industry from a welfare perspective. We consider the situation where firms decide to locate in one of two regions with different region-specific marginal costs in industries with and without entry regulation. We demonstrate that in the entry-regulated industry, service cost reduction is favorable for producers and the overall economy, but it may be unfavorable for consumers. In contrast, in the entry-unregulated industry, service cost reduction is unambiguously favorable for all agents. This result implies that governments have an incentive to implement policies to reduce service costs, and they need formulate policies to protect consumers when service costs are reduced under entry-regulation.