Data Sharing and Market Power with Two-Sided Platforms

Abstract

We study an economy in which consumers and merchants (sellers) interact on a two-sided platform. Consumers can share data about their tastes for different varieties of a single good with the platform which in turn sells this data to merchants. Data sharing increases gains from trade by improving match quality but gives more market power to the platform relative to the merchants which can reduce entry and consequently consumer welfare. This leads to an externality not internalized by consumers thus leading to more data sharing than is efficient. We highlight two reasons why more precise information increases the market power of the platform. The first is a copycat (private label) externality that increases the outside option for the platform of selling the good directly to consumers. The second is a consumer access externality that reduces the outside option of the merchants when information gets more precise, as more buyers are able to find their desired variety on the platform. Our model explains the qualitative differences between traditional retail platforms (physical stores) and digital online platforms and why the latter are more likely to require regulatory interventions that the former.