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Why Do Intermediaries Divert Search?

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  • Hagiu, Andrei
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    Abstract

    We analyze the incentives to divert search for an information intermediary who enables buyers (consumers) to search affiliated sellers (stores). There are three motives for diverting search (i.e. inducing consumers to search more than they would like): i) trading off higher total consumer traffic for higher revenues per consumer visit; ii) reducing the variance of store profits when store affiliation decisions are endogenous; and iii) influencing stores’ choices of strategic variables (e.g. pricing) once they have decided to affiliate. We show that search diversion remains a necessary strategic instrument for the intermediary even when the contracting space is significantly enriched: allowing the intermediary to charge consumers fixed fees, to offer them screening contracts, to subsidize search; allowing stores’ strategic decisions to be contractible or controlled by the intermediary. Keywords: Market Intermediation, Search, Two-Sided Markets, Platform Design. JEL Classifications: L1, L2, L8.

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    Bibliographic Info

    Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt3f34c5dk.

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    Date of creation: 08 Feb 2009
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    Handle: RePEc:cdl:econwp:qt3f34c5dk

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    1. Paul Milgrom, 2003. "Matching with Contracts," Working Papers 03003, Stanford University, Department of Economics.
    2. Paul Resnick & Christopher Avery & Richard Zeckhauser, 1999. "The Market for Evaluations," American Economic Review, American Economic Association, vol. 89(3), pages 564-584, June.
    3. Alvin E. Roth, 2002. "The Economist as Engineer: Game Theory, Experimentation, and Computation as Tools for Design Economics," Econometrica, Econometric Society, vol. 70(4), pages 1341-1378, July.
    4. Alvin E. Roth, 2009. "What Have We Learned from Market Design?," NBER Chapters, in: Innovation Policy and the Economy, Volume 9, pages 79-112 National Bureau of Economic Research, Inc.
    5. repec:rje:randje:v:37:y:2006:3:p:720-737 is not listed on IDEAS
    6. Daniel F. Spulber, 1996. "Market Microstructure and Intermediation," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 135-152, Summer.
    7. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
    8. Hagiu Andrei, 2007. "Merchant or Two-Sided Platform?," Review of Network Economics, De Gruyter, vol. 6(2), pages 1-19, June.
    9. Thomas Gehrig, 1993. "Intermediation in Search Markets," Discussion Papers 1058, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    10. Stahl, Dale O, II, 1988. "Bertrand Competition for Inputs and Walrasian Outcomes," American Economic Review, American Economic Association, vol. 78(1), pages 189-201, March.
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