Data and Competitive Markets: Some Notes on Competition, Concentration and Welfare

Abstract

Abstract Companies are increasingly using data to predict behavior and improve the relation with their customers. In this context, data exchange raises important concerns regarding competition, concentration and welfare. This paper presents a novel linear demand approach that captures data and information effects in competitive markets, which are conveniently summarized in a precision parameter. Subsequently, the proposed approach is applied to study the firm’s incentives to exchange data and their impact in fundamental market variables, welfare and market concentration measures. We found that the incentives for data exchange between competitor firms emerge when the individual information gains are strong enough to compensate for the competitor’s information gains, and the associated strategic correlation effect between varieties. The results also suggest that market concentration tends to increase after data exchange, but both consumers and producers benefit from it. The reason is that better data allows firms to positioning closer to consumers’ needs.