Price Stability and Improved Buyer Utility with Presentation Design: A Theoretical Study of The Amazon Buy Box
Track: Economics, online markets and human computation
Keywords: search friction, platforms, mechanism design, market equilibrium
TL;DR: Giving prominence to one seller in a platform may stabilize prices and improve buyer utility, when an appropriate mechanism is used to select this seller.
Abstract: Platforms design the forms of presentation by which sellers are shown to the buyers. This design not only shapes the buyers' experience but also leads to different market equilibria or dynamics. One component in this design is through the platform's mediation of the search frictions experienced by the buyers for different sellers. We take a model of monopolistic competition and show that, on one hand, when all sellers have the same inspection costs, the market sees no stable price as the sellers always have incentive to undercut each other, and, on the other hand, the platform may stabilize the price by giving prominence to one seller chosen by a carefully designed mechanism. This calls to mind Amazon's Buy Box design. We study natural mechanisms for choosing the prominent seller, characterize the range of equilibrium prices implementable by them, and find, somewhat counterintuitively, that in certain scenarios the buyers' surplus improves as the search friction increases.
Submission Number: 2029
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