Efficient Segmentation of Search Markets

2025-01-20

AI Summary

This paper examines the welfare effects of public information—specifically, market segmentation by seller quality—in bilateral search markets with frictions. We study a setting where buyers incur search costs and sellers are vertically differentiated, modeling a constrained-optimal segmentation problem that incorporates search externalities to characterize both socially optimal and equilibrium buyer assignments. Our theoretical contributions are threefold: (i) we derive a modified Hosios efficiency condition that precisely delineates the boundary of equilibrium efficiency; (ii) we prove that market equilibrium achieves social optimality under *any* segmentation if and only if this condition holds; and (iii) we fully characterize the optimal segmentation maximizing total surplus—showing it must be either full type disclosure or binary pooling—and provide necessary and sufficient conditions for switching between these two regimes. The results uncover how public signals enhance matching efficiency by steering buyer search behavior.

Technology Category

• Search and Optimization: Mixed Discrete/Continuous Search
• Constraint Satisfaction and Optimization: Search
• Game Theory and Economic Paradigms: Imperfect Information

Application Category

• Economics, Online Markets and Human Computation: Fairness, privacy, and diversity in economic environments
• Semantics and Knowledge: Applications of semantic technologies for improving search, browsing, recommendation, personalization
• Search and Retrieval-Augmented AI: Efficiency and scalability of Web search engines

Abstract

I consider a two-sided frictional search market where buyers search and match to vertically differentiated sellers. The market is segmented into submarkets based on seller types, with segmentation serving as a public signal that directs buyers' search. I characterize the socially efficient and equilibrium allocations of buyers across submarkets for any fixed segmentation, and identify a Hosios condition under which the equilibrium allocation is efficient. I further examine the design of surplus-maximizing segmentations, demonstrating the role of search externalities in determining whether the constrained-efficient segmentation fully reveals seller types or pools types into at most a binary partition. These results clarify the conditions under which the provision of public information is welfare enhancing in search markets with externalities.

Problem

• Analyzing welfare impact of public information in search markets
• Characterizing efficient and equilibrium buyer allocation across segments
• Designing surplus-maximizing market segmentation strategies

Innovation

• Market segmentation based on seller types
• Directed search using public information signals
• Binary partition design for surplus maximization