The Role of Quality in Internet Service Markets∗

The paper proposes an empirical framework to study online procurement markets. In these markets projects are often allocated through a mechanism which allows buyers to take into account seller’s non-price characteristics as well as his bid. The proposed methodology is designed to recover primitives of the environment in the presence of unobserved seller heterogeneity while accommodating two important features of such markets: buyer-specific choice sets and the high turnover of sellers. We apply our method to the data from an online market for programming services in order to assess buyers’ welfare gains associated with the globalization enabled by the Internet. We focus on the increased variety and competitive effects which arise due to the presence of low cost foreign sellers as the main welfare-improving consequences of globalization. We find that the Internet enables buyers to substantially improve on their outside (local) option, with a large part of the gains arising from access to the international