Online Search and Optimal Product Rankings: An Empirical Framework

Giovanni Compiani (), Gregory Lewis (), Sida Peng () and Peichun Wang ()
Additional contact information
Giovanni Compiani: Booth School of Business, University of Chicago, Chicago, Illinois 60637
Gregory Lewis: Amazon, Boston, Massachusetts 02138
Sida Peng: Microsoft, Boston, Massachusetts 02138
Peichun Wang: Unity, San Francisco, California 94016

Marketing Science, 2024, vol. 43, issue 3, 615-636

Abstract: We study the problem faced by an online retail platform choosing product rankings in order to maximize two distinct goals: consumer surplus and revenues/profits. To this end, we specify a version of the Weitzman sequential search model in which search reveals a consumer’s idiosyncratic taste for the product as well as vertical dimensions of its quality, and we derive convenient expressions for consumer surplus and revenues. To optimize consumer surplus, platforms should facilitate product discovery by promoting “diamonds in the rough,” that is, products with a large gap between the utility they deliver and what consumers expect based on the presearch information. By contrast, to maximize static revenues, the platform should favor high-margin products, potentially creating a tension between the two objectives. We develop computationally tractable algorithms for estimating consumer preferences and optimizing rankings, and we provide approximate optimality guarantees in the latter case. When we apply our approach to data from Expedia, our suggested consumer surplus–optimizing ranking achieves both higher consumer surplus and higher revenues relative to the Expedia ranking—delivering a Pareto improvement—and also dominates ranking the products in order of utility, which is intuitive but fails to leverage information on what consumers know presearch.

Keywords: consumer search; online platforms; product rankings; recommendation systems (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:43:y:2024:i:3:p:615-636

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