Search Steering in Two-Sided Platforms

Abstract

Many two-sided platforms, such as Amazon and eBay, are known to steer customers towards certain products based on their willingness to pay. In this article, we study platforms' incentives to adopt this type of market segmentation and present conditions under which this can generate distortions that negatively impact the surplus from buyers and sellers. In our environment, a monopolistic platform matches sellers with buyers. Upon being matched, each pair of buyer and seller negotiates prices. If they choose to transact, the platform receives a commission fee proportional to the value of the transaction plus a flat fee per transaction. The platform is assumed to have full information about customers' and sellers' outside options. We show that, as long as the market is in excess supply or as long as there is a crossing between the demand and supply curves, the platform's optimal matching is suboptimal from the perspective of buyers and sellers.

Keywords: Market Segmentation, Information Design, Two-sided markets

JEL Classification: C78, D47, D44