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Working Paper

Towards efficient information sharing in network markets

In this paper, we turn our attention to market failure due to information asymmetry between platforms and their users and between competing platforms.

By: , , and Date: November 10, 2021 Topic: Digital economy and innovation

Our paper has benefitted from inspiring discussions with Erik Brynjolfsson, Luis Cabral, Rebecca Christie, Maria Demertzis, Erika Douglas, Nestor Duch-Brown, Justus Haucap, Jan Krämer , Maciej Sobolewski, Sebastian Steffen, Tommaso Valletti, Reinhilde Veugelers, Guntram Wolff as well
as participants at Ascola 2021, Yale University’s Big Tech and Antitrust Conference 2020, OECD Competition Committee Hearing Dec. 2020, Bruegel, Digital Markets Competition Forum at Copenhagen Business School 16 June 2021, and the Boston University Platform Summit 27 May 2021. Georgios Petropoulos gratefully acknowledges financial support from the European Union’s Horizon 2020 research and innovation programme under Marie Sklodowska-Curie grant No. 799093. Bertin Martens acknowledges that the views and opinions expressed in this paper do not necessarily reflect those of the Joint Research Centre or the European Commission.

Digital platforms facilitate interactions between consumers and merchants that allow collection of profiling information, which drives innovation and welfare. Private incentives, however, lead to information asymmetries resulting in market failures both on-platform, among merchants, and off-platform, among competing platforms. This paper develops two product-differentiation models to study private and social incentives to share information within and between platforms. We show that there is scope for ex-ante regulation of mandatory data sharing that improves social welfare better than competing interventions, such as barring entry, break-up, forced divestiture or limiting recommendation steering. These alternate proposals do not make efficient use of information. We argue that the location of data access matters and develop a regulatory framework that introduces a new data right for platform users, the in-situ data right, which is associated with positive welfare gains. By construction, this right enables effective sharing of information together with its context, without reducing the value created by network effects. It also enables regulatory oversight but limits data privacy leakages. We discuss crucial elements of its implementation in order to achieve innovation-friendly and competitive digital markets.

Recommended citation:
Martens, B., G. Parker, G. Petropoulos and M. Van Alstyne (2021) ‘Towards efficient information sharing in network markets’, Working Paper 12/2021, Bruegel

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