Search Diversion, Rent Extraction and Competition
Executive Summary — Retailers, search engines, shopping malls and other intermediaries often deliberately design their physical layouts or e-commerce sites in order to divert customers' attention away from the products they were initially looking for, with hopes that they'll buy a bunch of other products, too. This paper explores various incentives for so-called "search diversion" in a couple of scenarios—when stores internalize their affiliation decisions with intermediaries, and when competition is introduced among intermediaries. Research was conducted by Andrei Hagiu of Harvard Business School and Bruno Jullien of the Toulouse School of Economics. Key concepts include:
- If an intermediary cannot price-discriminate among several stores, it can use search diversion to reduce the variance of store profits—thus improving its rent extraction power.
- When stores affiliate with multiple intermediaries but consumers affiliate with only one, the incentives to divert search are reduced. But when consumers affiliate with multiple intermediaries and stores affiliate with only one, intermediary competition may exacerbate search diversion incentives.
- The broad implication of this paper is that competition may lead to intermediation design decisions that go against customer preferences in favor of decisions that favor third-party sellers or advertisers.
This paper studies search diversion by competing intermediaries connecting consumers with third-party stores. First, we show that endogenizing store entry leads to more search diversion when intermediaries cannot price discriminate among stores because the intermediaries' incentives are aligned with the marginal stores. Second, competition among intermediaries may lead to more or less search diversion relative to monopoly, depending on whether consumers multi-home and stores single-home or vice-versa.