Who Benefits from Improved Search in Platform Markets?
27 Pages Posted: 12 Apr 2013
Date Written: April 8, 2013
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
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