“Why Do Intermediaries Divert Search?” by Andrei Hagiu
Harvard Business School
We analyze the incentives to divert search for an information intermediary who enables buyers (consumers) to search affiliated sellers (stores). There are three motives for diverting search (i.e. inducing consumers to search more than they would like): i) trading off higher total consumer traffic for higher revenues per consumer visit; ii) reducing the variance of store profits when store affiliation decisions are endogenous; and iii) influencing stores' choices of strategic variables (e.g. pricing) once they have decided to affiliate. We show that search diversion remains a necessary strategic instrument for the intermediary even when the contracting space is significantly enriched: allowing the intermediary to charge consumers fixed fees, to offer them screening contracts, to subsidize search; allowing stores' strategic decisions to be contractible or controlled by the intermediary.