Strategic Platform Search Design in the Two-Sided Platform Business Mode versus in the Merchant Business Mode

Current major digitalized intermediaries like Amazon, Taobao and Sam’s Club make a significant amount of investment each year in designing the search environments on their websites. In this paper, we propose a model for analyzing their search design strategy. More precisely, we endogenize an intermediary’s search design by allowing it to determine its consumers’ search cost. We are, therefore, able to address how search design adapts as product diversity changes and to consider the equilibrium effects on market structure, product price and intermediary’s profit in two polar business modes: the two-sided platform business mode and the merchant business mode. We find that the effect of product diversity on the intermediary’s equilibrium search design is not monotonic in both business modes. In addition, its influences on the market outcomes in two business modes are quite different. In this context, our model implies that when the intermediary’s product diversity is extremely high, the two-sided platform business mode could help the intermediary to reach a higher profit than the merchant mode. Otherwise, the merchant mode may bring more profit to the intermediary. To highlight relevant search design strategies, we use unique data sets of Aliexpress’s website and Sam’s Club’s website to show that our theoretical search design predictions are consistent with empirical results.