Electronic Platforms in a Consumer Search Model

Shopping malls, platforms and consumer search

“…As a result, the platform maximizes the total profit obtained by N firms which are offered to join. In Proposition 3 of his paper, Song (2014) shows that there is an optimal platform size, which is inversely related to the size of search friction s. This is similar to our results obtained for sufficiently large search frictions. However, when the search friction is low enough (below 2.5 × 10 −5 in Figure 2), the finiteness of our model kicks in: the optimal mall size is increasing in s, and mall's profit is a single-peaked function of N , as depicted on the first panel of Figure 1.…”

“…However, when the search friction is low enough (below 2.5 × 10 −5 in Figure 2), the finiteness of our model kicks in: the optimal mall size is increasing in s, and mall's profit is a single-peaked function of N , as depicted on the first panel of Figure 1. In Song (2014), as search frictions approach zero, the optimal mall size approaches infinity, thus the mall's profit function is similar to the one depicted in the second panel of Figure 1 (s = 0.001).…”

“…The primary difference between our model and Song's is that he assumes that there are infinitely many firms outside the platform, which effectively implies that off-platform profits are equal to zero. Instead, we look at a finite number of firms and show that, opposite to Song (2014), firms might have incentives to locate outside the platform when search frictions are small enough.…”