Competition, Persuasion, and Search

2024-11-17

AI Summary

This paper investigates information design in sequential search under a principal–agent framework, where the agent cannot directly observe product quality and must purchase signals from a profit-maximizing principal. Using a repeated contracting and optimal stopping game model, the analysis integrates game theory, mechanism design, and dynamic contract theory to fully characterize the equilibrium payoff set. A key contribution is the identification of a critical threshold for search cost: when costs are low, competition leaves total surplus and its allocation unchanged; when costs are high, competition reduces aggregate efficiency yet improves agent welfare—and may even incentivize a monopolist to disclose more information. Contrary to the conventional wisdom that monopoly invariably reduces efficiency, this work demonstrates a non-monotonic relationship between market structure and information provision, offering novel theoretical foundations for information economics and platform regulation.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Search and Optimization: Learning to Search

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Web Mining and Content Analysis: Content-based information diffusion
• Security and Privacy: Large-scale security measurements

Abstract

An agent engages in sequential search. He does not directly observe the quality of the goods he samples, but he can purchase signals designed by profit maximizing principal(s). We formulate the principal-agent relationship as a repeated contracting problem within a stopping game, and characterize the set of equilibrium payoffs. We show that when the agent's search cost falls below a given threshold, competition does not impact how much surplus is generated in equilibrium nor how the surplus is divided. In contrast, competition benefits the agent at the expense of total surplus when the search cost exceeds that threshold. Our results challenge the view that monopoly decreases market efficiency, and moreover, suggest that it leads to more information provision than does competition.

Problem

• Agent searches goods with unobserved quality and purchasable signals
• Competition's impact on surplus depends on agent's search cost threshold
• Monopoly may increase information provision compared to competition

Innovation

• Repeated contracting in stopping game
• Signals designed by profit-maximizing principals
• Threshold-based search cost impact analysis