Agentic Markets: Equilibrium Effects of Improving Consumer Search
This addresses the equilibrium effects of AI tools in markets for consumers and businesses, representing an incremental theoretical analysis.
The paper tackles the problem of how improved search technology affects learning and welfare in two-sided markets with AI-assisted consumers, finding that cheaper search improves consumer surplus while more informative search can degrade it unless the market learns as effectively as consumers.
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.