Abstract
Determining the effects of quality differentiation on the efficiency of two‐sided service markets is challenging. The presence of private information on both market sides and the heterogeneity of sellers can lead to substantial economic inefficiencies. Hence, this paper investigates how quality‐differentiated sellers affect market efficiency from the perspective of mechanism design theory. First, we characterize second‐best mechanisms for matching buyers and sellers. We then propose a heuristic algorithm for approximating the welfare‐maximizing match outcomes. Based on empirical data, our simulation study suggests that an increased quality differentiation can reduce market efficiency; however, this inefficiency vanishes as the market size increases.
Highlights
Advances in information technology have promoted the rise of twosided service markets in many domains
Extant literature does not sufficiently explain how to efficiently match buyers and sellers on platforms where two-sided private information about valuation and cost is present and sellers are characterized by exogenous quality levels
Our work addresses this limitation and characterizes a second-best mechanism that matches buyers and sellers based on differentiated service quality in the presence of twosided private information
Summary
Advances in information technology have promoted the rise of twosided service markets in many domains Internet platforms such as Airbnb and Uber enable digital marketplaces where buyers and sellers trade on-demand services for money. Airbnb and Uber, for example, rely on reciprocal feedback and reputation systems to enable quality differentiation Apart from these well-known platforms, markets for trading novel forms of services have emerged. Energy services such as charging services for electric vehicles, for example, provide a value-oriented approach toward quality-differentiated electricity consumption (Lim, Mak, & Rong, 2014; Salah, Flath, Schuller, Will, & Weinhardt, 2017; Woo et al, 2014). These charging services are typically differentiated by the power output provided, directly affecting the speed of charging (He, Mak, Rong, & Shen, 2017)
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