Search Steering in Two-Sided Platforms

What is it about?

Many two-sided platforms are known to steer customers towards certain products based on their willingness to pay. In this article, we study platforms' incentives to steer customers with a high willingness to pay towards products that generate a lower surplus and are more difficult to sell, rationing "easy sales" to cheapskates to maximize the overall number of transactions and commissions received. We show that when the platform charges a flat fee per transaction plus a commission proportional to the final price paid (a commission mechanism ubiquitous among e-commerce intermediaries), the platform will usually have incentives to segment the market in this manner. Furthermore, we show that this practice usually deteriorates the joint surplus from buyers and sellers compared to the efficient benchmark in which "easy sales" are allocated to those with a higher willingness to pay. We also find that higher search costs tend to increase the platform's incentives to implement this type of inefficient matching, as, in this case, users have more incentives to follow through the platform's (inefficient) recommendations, as opposed to finding better matches on their own.

Featured Image

Photo by Sergey Zolkin on Unsplash

Photo by Sergey Zolkin on Unsplash

Why is it important?

As this steering process can harm buyers and sellers, the results derived in this article can aid policymakers in devising strategies to curb this practice. For example, as we find that higher search costs tend to increase the platform's incentives to implement inefficient matches, policymakers should attempt to reduce search frictions, e.g., by prohibiting practices such as drip-pricing or other forms of search obfuscation.

Perspectives