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Faculty of Economics

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Charlson, G.

Searching for Results: Optimal Platform Design in a Network Setting

CWPE20118

Abstract: Large online platforms, like Airbnb or Amazon Marketplace, increasingly direct users to internal search engines that limit the number of sellers consumers observe. We show that such behaviour is consistent with profit maximisation. To do so, we model buyer-seller interactions as a series bipartite graphs, which are each realised with a probability chosen by the platform owner. Prominent players disproportionately increase competition, which decreases prices. To maximise profit, the platform owner ensures that buyers only observe a consistent number of sellers in every state of the world realised with positive probability. When products are vertically differentiated, the platform owner biases observation towards high-quality products, but doing so reduces prices, and, as a result, the optimal number of sellers in the network. The extent to which platforms in different markets highlight high-quality products and the number of sellers their search processes show is a function of both quality dispersion and substitutability.

Keywords: networks, platforms, industrial organisation, network design, games on networks

JEL Codes: D20 L20

Author links: George Charlson  

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe20118.pdf

Open Access Link: https://doi.org/10.17863/CAM.62833