Compatibility and Information Asymmetry in Online Matching Platforms

Abstract

Firms seeking business partners and individuals seeking life partners face several challenges in addition to finding available candidates. One of these challenges is uncertainty about a candidate’s compatibility with the match-seeker on various subjective criteria. Another challenge is authentication of objective quality features, particularly in online settings where credentials can be easily misrepresented. Online matching platforms can address these challenges through counseling services that help assess mutual compatibility of match-seekers and authentication services to validate match-seekers’ credentials. Using a stylized model, we show that the platform’s decisions to offer counseling and authentication services are influenced by match-seeker behavior in response to factors such as the platform’s counseling capability, the composition of the matching market, and the interactions between the two services. This leads to optimal strategies for the platform that are not obvious and can even be counterintuitive. For instance, offering better counseling does not necessarily result in higher revenues for the platform. And it may be optimal for the platform to reduce its access fee when it decides to offer an authentication service. We also show that when the platform’s counseling capability is modest, an increase in this capability increases the value of authentication (i.e., counseling complements authentication); however, when the platform’s counseling capability is high, counseling and authentication become substitutes, because narrowing the search to only high-value candidates based on authentication can exclude some compatible candidates. Our analysis and results provide valuable insights for platform operators on the relative value of counseling and authentication, and for researchers studying matching platforms for vertically and horizontally differentiated markets. This paper was accepted by Hemant Bhargava, information systems. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.03807 .