Abstract:

Online platforms invest large sums in their search technology. Motivated by this, we investigate how lowering search costs affects the welfare of market participants, in a model where buyers with horizontally differentiated tastes search and compete for goods in an auction. We identify a "matching effect", whereby lower search costs endogenously shift market participation in favor of some goods and against others. We prove that there is a unique equilibrium, and demonstrate that the decentralized market achieves the social planner's solution. Decreasing search costs thus improves joint welfare; and yet surprisingly joint seller revenue may fall.