Categorization and Search
Chaim Fershtman (TAU), Arthur Fishman (BIU),
and Jidong Zhou (NYU)
Who will sit on the Iron Throne?
Introduction
 In the basic search setup there are consumers who actively search for a product
that they would like to buy. Firms are passive and anonymous.
 The internet has not merely reduced search costs, but has also changed the way
that consumers search.
 Modern consumers use online sources that list sellers under various categories to
narrow down the list of potential sellers from which to further refine their search.
 Firms respond to these search procedures: effective targeting by strategically
choosing the categories under which they are listed.
We focus on the relationship between category architecture and the type of
information which may be credibly disclosed by …
firms to searching consumers.
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Our focus: Category architecture and the information disclosed to
searching consumers
 Both firms and consumers actively try to overcome informational asymmetries:
Category 1
Consumers
Choose category to
search
Categorization and Search
Category 2
Category 3
Firms
Choose category
to list
Fershtman, Fishman, and Zhou; May 2013
The Model
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
A search problem with categories
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
A search with categories equilibrium
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Horizontal categorization
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Horizontal categorization:
Figure 1: Horizontal categorization reveals quality information
The reverse is also possible. High quality to A and B and low
quality of both types to AB.
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Horizontal categorization reveals quality information
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Horizontal categorization
Figure 2: Pattern of demand when horizontal
categories reveal quality information
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Horizontal categorization reveals product type information only

Intuition: Straight forward

Holds for both verifiable and non-verifiable.
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Horizontal categorization reveals product type information
Figure 4: Pattern of demand when horizontal
categories reveal horizontal information.
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Horizontal categorization reveals no information
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Horizontal categorization: Pooling equilibrium
Figure 5: Pattern of demand when categorization reveals no
(horizontal or vertical) information.
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Horizontal categorization and consumer welfare
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Horizontal categorization and consumer welfare
Figure 5: Horizontal categorization and consumer welfare
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Vertical categorization
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Free entry and endogenous product quality
Proposition 7:
When there is free entry and the search cost is sufficiently small, then both the
quality revealing equilibrium and the product-type revealing equilibrium exist.
However the quality revealing equilibrium induces a higher fraction of high-quality
firms and also greater consumer surplus.
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Free entry: categories and product quality
 Assume that there is free (but costly) entry.
 Higher entry costs for high quality firms.
 Firms enter as long as they cover entry costs.
 Question: How do the category structure and type of equilibrium affect the
percentage of high quality firms and consumers’ surplus?
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Free entry and endogenous product quality
Proposition 8:
For sufficiently small search costs s both quality revealing and product type
revealing equilibria exist. However the quality revealing equilibrium gives rise to
higher consumer surplus than the product-type revealing equilibrium.
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013
Discussion and concluding comments

Size of the market.

Design of category system.
Who will sit on the Iron Throne?

Multi-listing categories.

Future work: Prominence and Categories.
Categorization and Search
Fershtman, Fishman, and Zhou; May 2013