Matching in the Sourcing Market : A Structural Analysis of the Upstream Channel

Building upon the structural two-sided matching model, we develop a framework to study the sourcing market in the context of marketing firms matching with manufacturers. Both sides prefer partners that could generate significant values with better abilities in the sourcing process. Moreover, experienced manufacturers are preferred by the branded marketing firms who may be even willing to compensate the matching intermediary more for facilitating that. Empirical research, measuring the values of such matching and the intermediary's pricing (through commission) on observed characteristics of the marketing firms and the low-cost manufacturers and the deals that result, is problematic, when some of the characteristics are only partially observed and the matching is endogenous. With the matching model, we can control for endogenous matching. We find evidence of positive assortative matching of pairs' size on both sides of the market. We also find manufacturers' location and tenure, and whether the marketing firms are listed or not, are important factors in identifying the preferred matching partners and the related ranking. Without controlling for the endogenous matching, the estimates of the intermediary's pricing equation are biased, especially for the marketing firms that specialize in luxury products