Signaling Competition in Two-Sided Markets

40 Pages Posted: 23 May 2023 Last revised: 15 Aug 2023

See all articles by Omar Besbes

Omar Besbes

Columbia University - Columbia Business School, Decision Risk and Operations

Yuri Fonseca

Columbia University - Columbia Business School, Decision Risk and Operations

Ilan Lobel

New York University (NYU)

Fanyin Zheng

Columbia University - Columbia Business School

Date Written: May 17, 2023

Abstract

We consider decentralized platforms facilitating many-to-many matches between two sides of a marketplace. In the absence of direct matching, inefficiency in market outcomes can easily arise. For instance, popular supply agents may garner many units from the demand side, while other supply units may not receive any match. A central question for the platform is how to manage congestion and improve market outcomes. We study the impact of a detail-free lever: the disclosure of information to agents on current competition levels. Disclosing competition reduces the perceived value of popular units, but, at the same time, it can help agents on the other side better elect across options. How large are such effects, and how do they affect overall market outcomes? We answer this question empirically. We partner with the largest service marketplace in Latin America, which sells non-exclusive labor market leads to workers. We propose a structural model which allows workers to internalize competition at the lead level and captures the equilibrium effect of such reaction to competition at the platform level. We estimate the model by leveraging agents' exogenous arrival times and a change in the platform's pricing policy. Using the estimated model, we conduct counterfactual analyses to study the impact of signaling competition on workers' lead purchasing decisions, the platform's revenue, and the expected number of matches. We find that signaling competition is a powerful lever for the platform to reduce congestion, redirecting demand, and ultimately improving the expected number of matches for the markets we analyze.

Keywords: Online marketplaces, Decentralized matching, competition, information design.

Suggested Citation

Besbes, Omar and Fonseca, Yuri and Lobel, Ilan and Zheng, Fanyin, Signaling Competition in Two-Sided Markets (May 17, 2023). Available at SSRN: https://ssrn.com/abstract=4451693 or http://dx.doi.org/10.2139/ssrn.4451693

Omar Besbes

Columbia University - Columbia Business School, Decision Risk and Operations ( email )

New York, NY
United States

Yuri Fonseca (Contact Author)

Columbia University - Columbia Business School, Decision Risk and Operations ( email )

New York, NY
United States

Ilan Lobel

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Fanyin Zheng

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www.fanyinzheng.com

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