Self-Preferencing and Search Neutrality in Online Retail Platforms

Abstract

Recent regulations on search neutrality prohibit retail platforms from self-preferentially prioritizing their first-party products over those of third-party sellers in consumers’ search rankings. This paper shows that, despite its good intention, search neutrality may unintendedly harm consumers and third-party sellers because of the strategic decisions of the platform and third-party sellers. In the short term, search neutrality can weaken the price competition between the platform and third-party sellers, which will hurt consumers if many of them ex ante prefer the third-party product, and can increase the platform’s profit if many consumers ex ante prefer the first-party product. In the long term, search neutrality can incentivize the platform to preempt the entry of third-party sellers if their entry cost is intermediate, further harming consumers and third-party sellers. Both unintended harms stem from two unique features of online retailing platforms: platforms personalize consumers’ search rankings, and consumers observe product prices before searching a product in depth. Alternative formulations of search neutrality, consumers’ search costs, and their product match likelihoods are considered to demonstrate the robustness of the main results. This paper was accepted by Dmitri Kuksov, marketing. Conflict of Interest Statement: All authors certify that they have no affiliations with or involvement in any organization or entity with any financial interest or nonfinancial interest in the subject matter or materials discussed in this manuscript. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.01795 .