Product Ranking on Online Platforms
47 Pages Posted: 6 Mar 2018 Last revised: 5 Jun 2019
Date Written: February 26, 2018
On online platforms, consumers face an abundance of options that are displayed in the form of a position ranking. Only products placed in the first few positions are readily accessible to the consumer, and she needs to exert effort to access more options. For such platforms, we develop a two-stage sequential search model where in the first stage, the consumer sequentially screens positions to learn the preference weight of the products placed in them and forms a consideration set. In the second stage, she learns the additional idiosyncratic utility that she can derive from each product and chooses the highest-utility product within her consideration set. For this model, we first characterize the optimal sequential search policy of a welfare-maximizing consumer. We then study how platforms with different objectives should rank products. We focus on two objectives: (i) maximizing the platform’s market share and (ii) maximizing the consumer’s welfare. Somewhat surprisingly, we show that ranking products in decreasing order of their preference weights does
not necessarily maximize market share or consumer welfare. Such a ranking may shorten the consumer’s consideration set due to the externality effect of high-positioned products on low positioned ones, leading to insufficient screening. We then show that both problems—maximizing market share and maximizing consumer welfare—are NP-complete. We develop novel near-optimal polynomial-time ranking algorithms for each objective. Further, we show that even though ranking products in decreasing order of their preference weights is suboptimal, such a ranking enjoys strong performance guarantees for both objectives.
Keywords: Two-Stage Consumer Search, Product Ranking, Search Costs, Online Platforms
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