Search, Matching, and the Role of Digital Marketplace Design in Enabling Trade: Evidence from Airbnb

Abstract

Digital peer-to-peer marketplaces have increased the volume of trade in underutilized assets. I use the setting of Airbnb to investigate transaction costs in these markets and the role of search engine design in reducing these costs. I show that this market is characterized by many options, heterogeneity in preferences, and uncertain availability. Consequently, search is limited, time-consuming, and sometimes results in failed transaction attempts due to rejections of searchers by hosts. I estimate a model of search and matching and use it to show that the search engine plays a critical role in facilitating transactions. Without availability tracking and filtering, searches with accepted inquiries would fall by 68% and rejections would increase by 140%. Lastly, I show how searcher outcomes can be improved from the status quo (as of 2014) by algorithms that redirect searchers towards listings that are more likely to accept those searchers.

JEL Classification: L14, D47, D83