Data Sharing and Market Power with Two-Sided Platforms

Abstract

We study an economy where consumers and merchants interact on a two-sided platform. The platform gathers consumer data and sells it to merchants. Data sharing increases gains from trade by improving match quality, but also generates two externalities which increase the market power of the platform and lower merchant entry. The gatekeeper externality arises from the platform’s control over access to consumers. The copycat externality derives from its ability to compete with its own merchants. These effects are not internalized by consumers and data sharing can be socially excessive. We study implications for the regulation of digital versus traditional platforms.