The Role of Product and Market Information in an Online Marketplace

Abstract

Although the online marketplaces have flourished, the role of product and market information in how it affects an online marketplace and how it can be leveraged to improve the sales or sales volume of the platform has not been explored in the prior research. We study how the provision of product and/or market information affects buyers' and sellers' behavior in an online marketplace by establishing the (Pareto-dominant) equilibrium for the sellers' pricing decisions under various information structures. Our main findings are as followings. First, we show that in equilibrium while sales volume of the platform increases in both the size of the buyers' pool and the size of the sellers' pool, sales increase only in the size of the buyers' pool and are unimodal in the size of the sellers' pool. Second, by analytically characterizing the platform's optimal information strategy as a function of the underlying market parameters and whether the platform's goal is to maximize sales or sales volume, we find that providing product and/or market information may backfire on the platform by jeopardizing its financial performance. Third, we demonstrate using numerical studies that information is more valuable to the platform when the goal of the platform is to maximize sales rather than sales volume, and when it faces a seller's market (i.e., demand-to-supply ratio is greater than one) rather than a buyer's market (i.e., demand-to-supply ratio is less than one).