Fields of Interest: Industrial Organization, Applied Microeconomic Theory
Working Paper (JMP)
Abstract: I analyze search markets where the choices of firms (e.g. prices) may or may not be observed by consumers prior to search. For individual consumer-firm pairs, the pair is transparent if the choice of the firm is known to the consumer prior to search and opaque if not. Search markets are fully transparent if all pairs are transparent, fully opaque if no pairs are transparent and partially opaque if a positive measure of pairs are transparent and a positive measure are opaque. Regardless of the opacity of a market, a demand-side equivalence between classic discrete choice and ordered search holds in equilibrium. This equivalence can be extended to the supply-side of the model in fully transparent markets because all consumers know the choices of all firms prior to search. However, a firm’s incentive to raise prices is increasing in the firm’s relative opacity to consumers. In search markets with strategic complementarities, if one or more firms face increased opacity, all equilibrium prices increase. Moreover, if an ordered search market is incorrectly modeled with the equivalent classic discrete-choice model, empirical estimates of firm profit margins and theoretical predictions of market prices correspond to the lower bound defined by full transparency. For datasets that include information about aggregate (or individual) search and selection, I outline an identification strategy that can be implemented to partially identify the underlying supply-side parameters of the search market without making assumptions about the opacity of the market.
Partially Transparent Markets
Abstract: I endogenize transparency in search markets and extend ordered search to include search over a network. Through the lens of the search model, I analyze markets where firms choose prices for products or locations on the network. In markets where consumers are able to pay for transparency prior to firm pricing, paying for transparency is analogous to contributing to a public good because prices decrease for all consumers in the market. If platforms control market transparency, platforms will adjust transparency to maximize total platform fees. Thus, the platform’s optimal choice depends on the fee structure where a platform will impose transparency if the platform’s incentives align with consumers. If firms simultaneously choose locations and transparency, a firm will never advertise in equilibrium because consumers correctly anticipate locations. However, lower transparency costs serve as a refinement over the set of possible equilibria because firms can inform consumers about location deviations by paying for transparency.