Agentic Markets: Equilibrium Effects of Improving Consumer Search

TL;DR

This paper models agentic markets with AI-assisted consumer search, analyzing how improved search technology affects market learning, welfare, and pricing dynamics in steady state.

Contribution

It introduces a model of AI-assisted search in two-sided markets and analyzes the effects of search improvements on consumer welfare and market prices.

Findings

Cheaper search enhances consumer learning and surplus.

More informative search can harm welfare unless market learns as much as consumers.

Search improvements can decrease inter-business competition, affecting prices.

Abstract

Motivated by agentic markets -- two-sided markets in which consumers and businesses are assisted by AI tools that facilitate consumers' search -- we study the impact of improved search technology on learning and welfare in markets. We put forth a model where consumers engage in costly search to acquire signals of product fit prior to purchase. The market tracks indications of fit for searched products and indications of quality for chosen products, thereby guiding searches. We characterize the long-run steady-state of the resulting dynamics as well as the impact of improving search technology. We find cheaper search improves learning and consumer surplus, whereas more informative search can degrade both unless the market learns as much as consumers about the products by, for example, ``reading the transcripts'' of agentic conversations. Finally, we consider the impact of search improvements on how businesses set prices. At equilibrium prices in symmetric markets, consumer surplus is improved by cheaper search but may be decreased by more informative search, due to weakened inter-business competition.