DP6041 Coarse Matching and Price Discrimination

Author(s): Heidrun C. Hoppe , Benny Moldovanu , Emre Ozdenoren

Publication Date: January 2007

Keyword(s): Matching , Nonlinear Pricing

JEL(s): C78 , D42 , D82 , L15

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP6041.asp.asp

We study two-sided markets with heterogeneous, privately informed agents who gain from being matched with better partners from the other side. Agents are matched through an intermediary. Our main results quantify the relative attractiveness of a coarse matching scheme consisting of two classes of agents on each side, in terms of matching surplus (output), the intermediary's revenue, and the agents' welfare (defined by the total surplus minus payments to the intermediary). In a nutshell, our philosophy is that, if the worst-case scenario under coarse matching is not too bad relative to what is achievable by more complex, finer schemes, a coarse matching scheme will turn out to be preferable once the various transaction costs associated with fine schemes are taken into account. Similarly, coarse matching schemes can be significantly better than completely random matching, requiring only a minimal amount of information.