Matching in the Sourcing Market: A Structural Analysis of the Upstream Channel

Building on the structural two-sided matching model, we develop a framework to study the sourcing market in the context of marketing firms matching with manufacturers. Both sides prefer partners that could generate significant values with better sourcing process abilities. Moreover, experienced manufacturers are preferred by the branded marketing firms who may even be willing to compensate the matching intermediary more for facilitating that preference. Empirical research, measuring the values of such matching and the intermediary's pricing (through commission) on observed marketing firms' characteristics and the low-cost manufacturers and the deals that result, is problematic, when some of the characteristics are only partially observed and the matching is endogenous. With the matching model, we can control for endogenous matching. We find evidence of positive assortative matching of pairs' size on both sides of the market. We also find that manufacturers' location and tenure, and whether the marketing firms are listed, are important factors in identifying the preferred matching partners and the related ranking. Without controlling for endogenous matching, the intermediary's pricing equation estimates are biased, especially for the marketing firms that specialize in luxury products.