Reducing Buyer Search Costs: Implications for Electronic Marketplaces

Information systems can serve as intermediaries between the buyers andthe sellers in a market, creating an "electronic marketplace"that lowers the buyers' cost to acquire information about seller pricesand product offerings. As a result, electronic marketplaces reduce theinefficiencies caused by buyer search costs, in the process reducing theability of sellers to extract monopolistic profits while increasing theability of markets to optimally allocate resources. This article modelsthe role of buyer search costs in markets with differentiated productofferings. The impact of reducing these search costs in analyzed in thecontext of an electronic marketplace, and the allocational efficienciessuch a reduction can bring to a differentiated market are formalized.The resulting implications for the incentives of buyers, sellers, andindependent intermediaries to invest in electronic marketplaces areexplored. Finally, the possibility to separate price information fromproduct attribute information is introduced, and the implications ofdesigning markets promoting competition along each of these dimensionare discussed.