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Market failure in a new model of platform design with partially informed consumers

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  • Gao, Fujuan
  • Fenoaltea, Enrico Maria
  • Zhang, Yi-Cheng

Abstract

In online markets, the role of a central platform that helps buyers and sellers to find each other is critical to reducing information asymmetry. To better understand the role of an intermediary on market outcomes, we propose a new platform design model whose foundation rests on the tools developed by physicists working on complex systems. Our framework allows us to study the influence of different platform strategies on player payoffs in a market with partially informed consumers. We find a fundamental market failure: the optimal platform strategy minimizes social welfare. Therefore, consumer search within the platform must be driven by a sub-optimal algorithm that solves the trade-off between the cost of fees charged by the platform and a high transaction volume.

Suggested Citation

  • Gao, Fujuan & Fenoaltea, Enrico Maria & Zhang, Yi-Cheng, 2023. "Market failure in a new model of platform design with partially informed consumers," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 619(C).
    • Handle: RePEc:eee:phsmap:v:619:y:2023:i:c:s0378437123003035
    DOI: 10.1016/j.physa.2023.128748
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