Information Sharing in the Online Marketplace when Sellers Incur Nonlinear Costs

Abstract

We study information dissemination in an online platform where multiple sellers distribute their partially substitutable products. The platform has superior information about consumer demand and determines whether, and with how many sellers, to share the information. An important feature of our study is that the sellers have a nonlinear cost structure. We investigate the effect of and incentives for information sharing using a unified model that incorporates three types of nonlinear cost structure: constant marginal cost, increasing marginal cost, and decreasing marginal cost. We show that the cost structure alone determines the direction of the impact of information sharing on revenue and cost, while the scope of information dissemination (the number of sellers who receive information) affects only the magnitude of that impact. The online platform has incentives to voluntarily share demand information with sellers if and only if the cost structure exhibits diseconomy, linearity, or moderate economy of scale. When the economy of scale is too large, sharing information with sellers will reduce the total revenue and thus the platform's earned commission. When sellers compete in quantity, the online platform shares information with fewer sellers if their products are more similar. The platform tends to share information with more sellers if they compete in price, as long as the cost structure has a diseconomy or moderate economy of scale. The commission rate also impacts the platform's optimal scope of information sharing, depending on the cost structure. The platform's information sharing policy should be made based on the product category and the nature of seller competition. If the product category has a large economy of scale, the platform should not share information with any seller. Otherwise, the platform should share information with a subset of sellers if they compete in quantity, or with all sellers if they compete in price.