For-Profit Search Platforms

Abstract

We consider optimal pricing by a profit-maximizing platform running a dynamic search and matching market. Buyers and sellers enter in cohorts over time, meet, and bargain under private information. The optimal centralized mechanism, which involves posting a bid-ask spread, can be decentralized through participation fees charged by the intermediary to both sides. The sum of buyers' and sellers' fees equals the sum of inverse hazard rates of the marginal types, and their ratio equals the ratio of buyers' and sellers' bargaining weights. We also show that a monopolistic intermediary in a search market may be welfare enhancing.

Entry-deterring agency

“…It can be shown that flatfee agency is equivalent to posted prices (i.e., the wholesale model) in our setup. Suppose, for example, that, like in Niedermayer and Shneyerov (2014), the intermediary charges upfront participation fees τ B from buyers and τ S from sellers and then allows buyers and sellers to randomly match and bargain by a random proposer game in which the seller makes an offer with probability α and the buyer with probability 1 − α. In equilibrium, any seller that makes an offer offers p B ; any buyer that proposes offers p S ; and only buyers with v ≥ p B and sellers with c ≤ p S enter.…”

“…Starting with the pioneering work by Caillaud andJullien (2001, 2003), Rochet andTirole (2003, 2006), Anderson and Coate (2005) and Armstrong (2006), this literature has primarily focused on monopoly platforms or competition between platforms, abstracting from the exact mechanisms the platforms employ to generate surplus, from traders' options to circumvent the platform, and the platform's incentives to prevent them from so doing. 7 Two notable exceptions that explicitly analyze the platform's trading mechanism are Gomes (2014) and Niedermayer and Shneyerov (2014). Competition between wholesale intermediaries and alternative exchanges fares prominently in the works of Rubinstein and Wolinsky (1987), Stahl (1988), Gehrig (1993), Spulber (1996), Bloch and Ryder (2000), Rust and Hall (2003), Loertscher (2007) and Neeman and Vulkan (2010), which, however, do not address intermediaries' incentives and options to drive out the competing exchanges.…”

“…Our paper builds on the existing literature. Participation fees, which are equivalent to the wholesale model, have been analyzed by Niedermayer and Shneyerov (2014), while Loertscher and Niedermayer (2017a,b) analyze brokers' fee structures from an optimal pricing perspective for the agency model. These papers assume that there is no competing 6 The equivalence between flat participation fees and the wholesale model have been shown e.g.…”

“…These papers assume that there is no competing 6 The equivalence between flat participation fees and the wholesale model have been shown e.g. in Niedermayer and Shneyerov (2014) for arbitrary distributions of traders' types. See also Belleflamme and Peitz (2015, Chapter 22) for equivalence between the wholesale model and a flat transaction fee (i.e.…”

From Bottom of the Barrel to Cream of the Crop: Sequential Screening With Positive Selection

“…3 For instance, auctions of incentive contracts, which amount to a left-truncation of the winner's efficiency's probability distribution, deliver for the winner the same power of incentive scheme as if the winner were a monopolist; optimal auctions thus only reduce the fixed component of rewards (Laffont and Tirole (1987)). Another application of this property of the hazard rate is Niedermayer and Shneyerov (2014), in which a platform matches buyers and sellers. The mechanism that maximizes platform profit can, as usual, be derived by maximizing total virtual surplus.…”