Do Lower Search Costs Benefit Intermediaries?

Abstract

Intermediaries—such as Amazon, Alibaba Group, and Walmart—play critical roles in digital markets: This paper proposes a model for analyzing how search cost affects their market outcomes. Distinguished from existing search literature, we introduce network effects to the market by allowing buyers to have positive preferences for product variety. In addition, we relax the exogenous demand and supply assumptions in the conventional search literature to study how search affects participation on both sides of the market. Through the model, we focus on studying and comparing two important types of intermediary: the two-sided platform; and the one-sided retailer. We find that reducing search costs does not necessarily increase the profit of both intermediary types. Furthermore, its influences are highly varied—depending on both the type of intermediary and its buyers’ preferences for variety.