Consumer Search, Firm Heterogeneity, and Platform Design

ABSTRACT

We study the optimal design of a monopoly platform that interacts with heterogeneous firms and consumers who face uncertainty about product values and prices. Consumers search randomly among firms recommended by the platform. The platform designs a menu of contracts tailored to different firm types and allocates consumer visits across these firms. We show that the optimal platform design creates a “superstar effect,” whereby high‐type firms capture a disproportionately large market share, and improves consumer welfare relative to the no‐design benchmark.