Abstract

Traditional keyword-based search engines often create a "winner-take-all" dynamic that favors mainstream sellers catering to the median consumer. Idiosyncratic consumers, those with unique preferences, and informationally constrained consumers, those with limited product knowledge or low search-efficiency, frequently settle for mainstream options that offer a suboptimal fit for their true preferences. On the other hand, the dominance of mainstream sellers marginalizes niche participants, such as startups, small businesses, minority-owned enterprises, and those sellers who cater to minority or unique interests. This research investigates how the transition to AI-based search mechanisms on e-commerce platforms fundamentally alters this mainstream dominance. Unlike traditional search, AI-driven discovery facilitates a process of consumer self-discovery, allowing for the revelation of true preferences even when the consumer cannot explicitly articulate them through keywords. We study this phenomenon where the AI serves as a bridge that aligns consumer perceived preferences with their true utility. By employing a game-theoretic model based on a modified Hotelling framework, we analyze consumer surplus and social welfare across varying levels of market breadth. The model specifically evaluates the trade-off between platform effort in information revelation and the consumer's own search effort. Our findings indicate that AI-based search acts as a powerful equalizer. By reducing the search frictions that typically trap informationally disadvantaged consumers in the mainstream center, AI directs these users toward "diamonds in the rough"—niche sellers that provide a superior preference match. The results of our modeling identify a significant increase in overall social welfare. Crucially, this surplus is not distributed uniformly; the gains are most pronounced for non-mainstream consumers and non-mainstream sellers. For niche sellers, AI-based search provides a pathway to discovery that bypasses the high-cost keyword competition dominated by incumbents. For consumers with unique tastes, technology increases their surplus by allowing them to find products that truly fit their needs rather than just those that are most visible. This study contributes to the literature on the welfare effects of information asymmetry by demonstrating how AI-driven discovery can foster a more diverse and inclusive marketplace.

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