The Matchmaker ’ s Dilemma

Matchmaking is a complex process and requires tremendous expertise. Matchmakers in various industries often advertise proprietary technologies that would presumably help users find an ideal match in a shorter period of time. However, matchmakers might seek to deliberately reduce their matchmaking effectiveness because users would thus remain clients for a longer time and hence pay more fees. This paper considers a matchmaking market with network effects and strategic consumers, and provides the conditions under which the matchmakers would provide effective versus ineffective services. We find that matchmakers may indeed offer imperfect services, even when the provision of matchmaking technology is costless. Moreover, stronger pricing power may paradoxically lead to lower technology provision, precisely when consumers value relationships the most. Network effects typically encourage matchmakers to offer less precise matchmaking, so as to retain the users in the market and create positive externalities. Consumers’ strategic behavior also leads to lower technology provision, but only under competition. ∗Yue Wu is PhD candidate at INSEAD, Singapore; Kaifu Zhang is Assistant Professor of Marketing at Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA, USA; V. Padmanabhan is Professor of Marketing and the Unilever Chaired Professor of Marketing, INSEAD, Singapore. E-mails: yue.wu@insead.edu, kfzhang@andrew.cmu.edu, paddy.padmanabhan@insead.edu.