Who Benefits from Improved Search in Platform Markets?

Abstract

Online platforms invest large sums in their search technology. Motivated by this observation, we investigate how lowering search costs affects the welfare of market participants, in a model where buyers with horizontally differentiated tastes search and then compete for differentiated goods in an auction. We identify a "matching effect", whereby lower search costs lead to better matches; and a "segmentation effect" whereby lower search costs endogenously shift market participation in favor of some goods and against others. We prove that there is a unique equilibrium, and demonstrate that the decentralized market achieves the social planner's solution. Decreasing search costs thus improves joint welfare; and yet surprisingly it is possible for segmentation effects to dominate matching effects, and joint seller revenue to fall.

Keywords: Platforms, Auctions, Search

JEL Classification: D44, D83, L00