Strategic Search Diversion, Product Affiliation and Platform Competition

Abstract

Platforms use search diversion in order to trade off total consumer traffic for higher revenues derived by exposing consumers to products other than the ones that best fit their preferences. Our analysis yields three key and novel insights regarding search diversion incentives, which have direct implications for platforms’ strategies and empirical predictions. First, platforms that charge positive access fees to consumers have weaker incentives to divert search relative to platforms that cannot (or choose not to) charge such fees. Second, endogenizing the affiliation of products that consumers are not interested in (advertising) leads to stronger incentives to divert search relative to the exogenous affiliation (vertical integration) benchmark, whenever the marginal product yields higher profits per consumer exposure relative to the average product. Third, the effect of platform competition on search diversion incentives depends on the nature of competition. Competition for advertising leads to more search diversion relative to competition for consumers. Both types of competition lead to at least as much search diversion as a monopoly platform. Nevertheless, in the case of competing platforms, the equilibrium level of search diversion increases with the degree of horizontal differentiation between platforms.

Keywords: Competition, Search platforms, Two-sided market

JEL Classification: L1, L2, L8