Impact of Market Thickness and Heterogeneity on Matches in Online Marketplaces with Active Providers
Abstract
In online service marketplaces, supply-side thickness – the number of providers – is widely believed to be crucial for facilitating matches, i.e., transactions between providers and customers. The empirical literature generally supports this view, providing evidence for the hypothesis that market thickness increases matches, albeit at varying rates. This support is typically obtained in contexts with a passive seller listing where all sellers are readily listed for customers. Distinctively, our study empirically examines an online marketplace where providers are active, meaning they must take an action to be listed. For our study, we collaborated with a leading U.S. online solar marketplace that connects solar panel installers with potential adopters. We use an instrumental variable approach and advanced clustering algorithm to investigate how supply-side thickness affects transactions in such marketplaces. Our analysis of an online marketplace with active providers reveals results that challenge the conventional understanding: We find a significant, inverted U-shaped relationship between market transactions and supply-side thickness. This indicates that transactions initially increase with thickness up to a certain thickness threshold, after which they begin to decline. This finding diverges from the general understanding in the literature, suggesting the need for new marketplace design strategies. We also show that increased market heterogeneity negatively impacts transactions, and this effect is exacerbated in thicker markets. To our knowledge, this is the first empirical study that explores the effect of market heterogeneity on marketplace transactions. Our findings highlight the complex effects of increased thickness and heterogeneity, offering valuable insights to marketplace operators.
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https://kenaninstitute.unc.edu/publication/impact-of-market-thickness-and-heterogeneity-on-matches-in-online-marketplaces-with-active-providers/
