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Search Frictions and Welfare in a Market for Prominence: Theory and Experiment

Abstract: In online marketplaces, sellers pay platforms to make their products more visible and easier to inspect, creating a market for search prominence. I study how search friction affects the level and distribution of surplus in this market. In my model, two ex-ante identical sellers bid for a prominent position in a second-price auction and then simultaneously post prices. The consumer observes both prices and learns her match value for the prominent seller’s product for free before deciding whether to incur a search cost to inspect the second seller’s product. I derive equilibrium bids, price distributions, and search cutoffs, and test these predictions in a laboratory experiment with low and high search costs. Platform auction revenue changes little as search cost rises, despite the predicted increase. Total and consumer surplus decrease with search cost, but consumer surplus falls proportionally much less than predicted. At both search costs, consumer surplus exceeds equilibrium benchmarks, whereas sellers jointly receive only about a fifth of total surplus after paying for prominence. Further analysis of bidding, pricing, and search behavior helps explain these findings.

Revisiting the Intra-Team Communication Method to Elicit Level-k Reasoning in Beauty Contests and 11–20 Games

with Istiak Ahmed, Patarasate Unjitwattana, Emily Yunxi Xie, Meng-Jhang Fong, and Po-Hsuan Lin

First author. Revising at European Economic Review.

Abstract: How level-0 players behave and how they are perceived by higher-level players are central questions in the literature on level-k models of boundedly rational strategic reasoning. To study these twin questions, we apply the intra-team communication method developed by Burchardi and Penczynski (2014) to identify level-0 actions and beliefs in the canonical beauty contest game and in a variant of the 11–20 game of Goeree et al. (2018), in which behavior appears inconsistent with the standard level-k model. In the beauty contest game, we replicate Burchardi and Penczynski (2014)'s finding that elicited level-0 beliefs align with observed level-0 actions. In the variant of the 11–20 game, however, elicited level-0 beliefs and observed level-0 actions diverge, and both depart from the standard level-0 assumption, suggesting a complementary explanation for the behavioral pattern documented by Goeree et al. (2018).

Coordination under Uncertainty and Noisy Communication: A Generalized Email Game

Abstract: Which information transmission protocols improve coordination under uncertainty and noisy communication? Theory is indeterminate between an inefficient "tacit" equilibrium, where information is ignored, and an efficient "vocal" equilibrium, where players act on it. We test this in a laboratory experiment based on a generalized e-mail game, exogenously varying the message-generation rule across three protocols. Vocal behavior rises with the incentive to take the risky action, and relative to an automatic protocol, voluntary messaging significantly improves coordination. However, a sunk cost to sending reduces vocality by inducing senders to opt out. These patterns suggest that voluntariness credibly signals players’ intent to coordinate via forward induction, and that the value of cost-free signaling for equilibrium selection hinges on the alignment of interests.