Search, Selectivity, and Market Thickness in Two-Sided Markets

Abstract

This paper investigates search and matching in online marketplaces, emphasizing how user behavior responds to the presence of others on the platform, which I call ``market thickness. Unlike standard settings in which firms typically benefit from increasing their customer base, in two-sided markets, changes in market thickness can induce complex effects in matching due to the endogenous adjustment of search and selectivity. This paper explores how changes in one side of the marketplace can affect the platform as a whole by causally measuring the independent effects of market size and competition size on behavior. I implement a field experiment that varies information sent to platform participants about the number of potential matches (market size) and number of competitors. I use this experimentally-induced variation to estimate the parameters of a microfounded model to measure general equilibrium matching outcomes. Consistent with intuition and observational patterns, individuals generally become more selective when they are told they have more potential matches, and less selective when they are told they have more competition. I find that an increase in market size does not necessarily increase match quality due to heterogeneous effects of market thickness on selectivity. I then show how changing selectivity by adjusting the cost of sending match proposals may mitigate negative effects of changes in market and competition size.