Signaling Competition in Two-Sided Markets

Abstract

Consider a platform facilitating decentralized many-to-many matches between two sides in the presence of supply market congestion. A key attribute of supply is how competitive it will be for demand to obtain the supply after the match. Should the platform reveal current competition levels to potential demand? Such signaling of competition can have both negative and positive effects for the platform and the various sides of the market. For example, signaling there is competition for a supply unit reduces its value but also redirects the demand's attention to alternative supply units. Which effect is dominant for the platform is unclear a priori. We answer this question empirically in the context of a labor platform. To do so, we partnered with the largest services marketplace in Latin America, GetNinjas, which sells non-exclusively labor market leads (supply) to service workers (demand). We propose and estimate a structural model in which workers can account for current competition but also internalize expected future competition levels. Using the estimated model, we conduct counterfactual analysis to study the impact of signaling competition on workers' lead purchasing decisions and the platform's revenue. We find that signaling competition significantly reduces congestion for the most attractive leads, redirects demand to other leads, and ultimately improves marketplace outcomes for the market we analyze.

Keywords: Two-sided markets, decentralized markets, marketplace competition, information design.