Matchmaker Competition and Technology Provision
Yue Wu, Kaifu Zhang, and V. Padmanabhan (2017)
Matchmaking is a complex process that requires considerable expertise. Matchmakers in various industries often advertise proprietary technologies that presumably help users find an ideal match in a short period of time. However, matchmakers may have incentives to provide suboptimal matchmaking services so that users remain clients for a longer time and pay more fees. This paper considers a matchmaking market with network effects and strategic consumers, and analyzes under what conditions matchmakers would offer more effective versus less effective matchmaking services. We find that stronger pricing power paradoxically leads to lower technology provision when consumers have high valuation for the matchmaking service. Moreover, network effects typically encourage matchmakers to retain the users in the market to create positive externalities, which can result in less precise matchmaking. In addition, consumer patience prompts competing matchmakers to implement ineffective technology. In two extensions, we examine simultaneous versus sequential decisions of technology and subscription fees, and we explore asymmetric two-sided markets.