Two‐sided markets: The influence of market power on information utilization strategy and welfare

Abstract

AbstractIn the digital age, platforms have leveraged consumer data to discern product preferences, thereby bolstering transaction rates via personalized recommendations. As such, consumer information not only serves as a crucial resource for market expansion but also as a competitive tool for personalized recommendations. Our research explores the strategic application of consumer information by dual‐sided platforms, within the context of two upstream merchants vending identical goods. We scrutinize the decision‐making process of these platforms in three distinct scenarios, examining their propensity to utilize consumer information for personalized recommendations, and the subsequent ramifications on pricing, consumer surplus, and social welfare. Our findings suggest a tendency among platforms to exploit consumer information, thereby inducing merchants to adopt a standardized pricing strategy through adjusted commissions. However, when a significant disparity in platform strengths is present, the more dominant platform is inclined to elevate commission levels, leading to discriminatory pricing by merchants. Interestingly, our study reveals that on platforms where information utilization and pricing strategies are optimally balanced, consumer surplus escalates in tandem with the intensification of inter‐platform competition. In contrast, total social welfare diminishes with increased competition. This research offers valuable insights into the strategic use of consumer information by platforms, with significant implications for pricing strategies, consumer surplus, and social welfare.