Consumer Behavior and Search on Platforms

• Applicants: Professorin Oezlem Bedre-Defolie, Ph.D.; Professor Dr. Markus Reisinger
• Subject Area: Economic Theory ; Economic Policy, Applied Economics
• Term: since 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 462020252

Consumer search behavior and reactions of firms to this behavior is a very important topic that drives efficiency of markets. This holds particularly for online platforms, as they have considerably facilitated consumer search in recent years. A platform might have an incentive to steer consumers to search results in its preferred way, as it collects commissions over sales. However, those incentives are not necessarily aligned with the ones of consumers, which may call for consumer protection and regulatory interventions (see the EC’s Digital Markets Act, 2020, and the US bills, 2021). In this project, we aim at developing a platform model that explicitly takes into account the platform’s gatekeeper role of providing access to information about products to consumers and the consumers’ search behavior. We plan to analyze different instruments to steer consumers with respect to their competitive consequences. Among these instruments are different ranks in the listing, default settings for searches, and salience of paid-for-advertisements. We explicitly consider how consumers’ choice sets are determined by the search rule of a platform, that consumers have a limited amount of time to search or face behavioral biases by forming incorrect reference points. All these can potentially be exploited by platforms. We plan to consider in detail how consumers’ beliefs about a platform’s ranking mechanism affect consumers’ search for their best match and the equilibrium behavior of platforms. We want to develop a search model that allows for flexible consumer behavior and includes either knowledge or ignorance of commission fees. Our goal is to provide a framework, which allows us to derive potential welfare consequences of distorted consumer beliefs about ranking criteria and assess different policy tools with respect to their effectiveness in reducing distortions of welfare in the market of ranking websites. This will also help us to understand better whether competition can mitigate or may even exacerbate potential inefficiencies and how multi-homing consumers may adjust their beliefs. This is an important step to gain knowledge how transparent information about ranking criteria changes consumer search. We also plan an analysis of the filtering choices of platforms on comparison websites. Prominence of filtering attributes induces consumers to put more emphasis on these attributes when comparing products, which may facilitate search. However, consumers need to spend time and effort to discover potentially important attributes of these products that are not listed in the filters. The filtering choices are again driven by consumer beliefs on how platforms choose their respective filters and rankings, dependent on factors consumers focus on when comparing listings. We would like to build a general consumer search framework to analyze how filtering attributes affect consumers’ search and the platform’s optimal choice of these attributes.

• DFG Programme: Research Units
• Subproject of: FOR 5392: Consumer Preferences, Consumer Mistakes, and Firms' Response
• International Connection: Italy
• Co-Investigator: Professor David Ronayne, Ph.D.