Optimal Matchmaking Strategy in Two-sided Marketplaces
65 Pages Posted: 8 Mar 2020 Last revised: 13 Apr 2022
Date Written: April 13, 2022
Online platforms that match customers with suitable service providers utilize a wide variety of matchmaking strategies: some create a searchable directory of one side of the market (i.e., Airbnb, Google Local Finder); some allow both sides of the market to search and initiate contact (i.e., Care.com, Upwork); others implement centralized matching (i.e., Amazon Home Services, TaskRabbit). This paper compares these strategies in terms of their efficiency of matchmaking, as proxied by the amount of communication needed to facilitate a good market outcome. The paper finds that the relative performance of the above matchmaking strategies is driven by whether the preferences of agents on each side of the market are easy to describe. Here, ``easy to describe'' means that the preferences can be inferred with sufficient accuracy based on responses to standardized questionnaires. For markets with suitable characteristics, each of the above matchmaking strategies can provide near-optimal performance guarantees according to an analysis based on information theory. The analysis provides prescriptive insights for online platforms.
Keywords: market design, online platforms, two-sided matching, communication complexity
JEL Classification: D47, D83, C78
Suggested Citation: Suggested Citation