Will a matchmaker invite her potential rival in?

Abstract

This paper analyzes optimal strategies of an incumbent intermediary, who matches agents on the two sides of a market, in the presence of entry threat under alternative scenarios. It shows that, when entry is free, strategic entry accommodation is the optimal choice of the incumbent - not entry deterrence, unless the variation in agents' types is small. Entry accommodation remains optimal for the incumbent for a wide range of parametric configurations even when there is a fixed cost of entry. These results are in sharp contrast to the predictions of existing models of entry.