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Information externalities and intermediaries in frictional search markets
Author(s) -
Shi Xianwen,
Siow Aloysius
Publication year - 2014
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/caje.12114
Subject(s) - intermediary , externality , search cost , business , microeconomics , matching (statistics) , industrial organization , welfare , private information retrieval , commerce , economics , marketing , computer science , market economy , statistics , mathematics , computer security
In frictional matching markets with heterogeneous buyers and sellers, sellers incur discrete showing costs to show goods to buyers who incur discrete inspection costs to assess the suitability of the goods on offer. We study how brokers can help reduce these costs by managing the level and mix of goods in their inventory. Intermediaries emerge and improve social welfare when there is sufficient heterogeneity in the types of goods and preferences. Learning and inventory management enable search intermediaries to internalize information externalities generated in unintermediated private search.