Impact of Search Engine Characteristics on Electronic Markets and Sellers' Pricing Strategies

Abstract

Internet-based electronic markets facilitate buyer search for seller offerings and comparison of products on the basis of price and product features. Search engine capabilities such as Recall, Precision and Ranking Accuracy determine the efficiency with which buyers can search for and compare products and the resulting buyer surplus and seller profits. This research investigates the impact of each of these factors on buyer and seller strategies at equilibrium. This paper explains certain counter intuitive market phenomena where some successful electronic markets offer less choice to buyers than their competitors. The analysis is driven by a set of analytical models of an electronic market under varying conditions of sellers' market shares, buyer search strategies and search engine technology. The models developed here draw from existing theories in information economics and computer science. The results demonstrate that precision has a greater direct impact on buyer surplus than recall and that buyers will forego some choice in exchange for greater accuracy of product description, especially in products that are complex or are characterized by ambiguity in product description and terms of trade. Finally, the seller with the greatest market share stands to gain most from offering search engine services to buyers and in a market characterized by two or more sellers with significant market shares, search engine services will always be offered free of cost to buyers.