Strategic Search Diversion and Intermediary Competition

We study search diversion by competing intermediaries connecting consumers with thirdparty stores (sellers). Search diversion is a strategic instrument that enables intermediaries to trade-off total consumer traffic for higher revenues per individual consumer visit. It is particularly useful in contexts in which the stores or products which are most sought-after by consumers are not the ones that yield the highest revenues for the intermediary that provides access to them. First, we show that intermediaries have stronger incentives to divert search when store entry is endogenous and intermediaries cannot perfectly price discriminate among stores. This is because intermediaries’ incentives are driven by the marginal stores, which benefit the most from search diversion. Second, competition among intermediaries can lead to more search diversion relative to monopoly when consumers multihome and stores singlehome: in this case, intermediaries’ incentives are driven by store preferences. Conversely, competition leads to less search diversion when consumers singlehome and stores multihome: in this case, intermediaries seek to maximize consumer surplus.