Platform Search Design: The Roles of Precision and Price

Abstract

This study develops a model of platform search design that incorporates the product-buyer match precision and the price weighting to study how the platform's search design interacts with its revenue models. The analysis shows that the effect of precision on price is determined by the interplay between competition and incentives to search. When precision is low, increasing precision decreases prices by intensifying competition. However, when precision exceeds a threshold, it leads to higher prices because consumers are discouraged from active search as products become more homogeneous. The result has important implications for the platform's search design under commonly observed revenue models: commission and ad-slots. If the platform improves the match precision in a surplus-based search design, its revenue may decrease because it ignores sellers' strategic responses to the search environment. An optimal search design that fully accounts for such responses features an increase in the price weighting at the threshold precision. Apart from the threshold, the optimal designs vary depending on the platform's revenue models. In the commission model, the optimal price weighting can increase or decrease in precision. In the ad slot model, the optimal price weighting first decreases then increases in precision.

Keywords: Consumer Search, Platform, e-Commerce