Why Do Intermediaries Divert Search?

Abstract

We analyze the incentives to divert search for an information intermediary who enables buyers (consumers) to search affiliated sellers (stores). We identify two original motives for diverting search (i.e. inducing consumers to search more than they would like): i) trading off higher total consumer traffic for higher revenues per consumer visit; ii) influencing stores’ choices of strategic variables (e.g. pricing) once they have decided to affiliate. We characterize the conditions under which there would be no role for search diversion as a strategic instrument for the intermediary, thereby showing that it occurs even when the contracting space is significantly enriched. We then discuss several applications related to on-line and brick-and-mortar intermediaries.

Keywords: Market Intermediation, Search, Two-Sided Markets, Platform Design.

JEL Classification: L1, L2, L8