Competition In Mediation Services: Modeling the Role of Expertise, Satisfaction, and Switching Costs

Abstract

This article analyzes competition among mediation service providers that match clients and vendors in a horizontally differentiated market. This is an issue that is important for decision support of mediators in determining pricing and service strategies. We present a simulation model to simultaneously represent search as well as the behaviors of clients, vendors, and multiple competing mediators. Among our findings: intermediaries find it optimal to offer registration fee incentives and derive revenues from transaction fees from successful matches; as switching costs increase, incumbent utilities increase and entrant utilities decrease; expertise, modeled as the ability of mediators to assess vendor attributes accurately, is a powerful competitive weapon for entrants to erode the incumbent intermediary's first mover advantage. On the other hand, client satisfaction is an instrument for an incumbent intermediary to deter entrance by competitors.

Keywords:

• mediation
• competition
• search
• expertise
• satisfaction
• switching costs

ACKNOWLEDGMENTS

We thank the editor-in-chief and anonymous referees for their encouragement and constructive comments that have greatly helped improve the article. This research was supported by NSF grants 0926376, 0926371. The usual disclaimers apply.

Notes

¹We thank an anonymous reviewer for suggesting this example.