Thursday, September 6, 2007

Market Intermediary: Angel or Devil?

Ever wander around a store and wonder why it's so hard to find what you're looking for? Don't worry, it might not be you. A new research conducted by HBS professor Andrei Hagiu and colleague Bruno Jullien shows that retailers—and malls, magazines, brokers, familiar search engines, and Internet shopping sites—can sometimes have an economic incentive to purposefully complicate things for consumers. Here is the abstract:

“We propose a model for analyzing an intermediary's incentives to increase the search costs incurred by consumers looking for sellers (stores). First, we show that the quality of the search service offered to consumers is more likely to be degraded (i.e. the probability that consumers find their favorite store in the first round of search is less than 1) when the intermediary derives higher revenues from consumers shopping at the lesser-known store relative to revenues from consumers shopping at the more popular store. Second, the intermediary may have an incentive to degrade the quality of search even further when its design decision influences the prices charged by stores. By altering the composition of demand faced by stores, the intermediary can force the latter to price lower and thereby increase total consumer traffic.”

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