Self-Preferencing and Price Competition on Platforms

Abstract

We study how a platform that also sells its own product allocates visibility between its own product and a competing third-party product. Some consumers compare prices, while others buy only from the first-listed seller. The platform chooses the probability that its own product appears first and charges the third-party seller a commission fee. Both sellers randomize over prices to trade off profit margins against attracting price-sensitive consumers. By making the ranking decision endogenous, we show that cost asymmetries can lead the platform to favor a third-party product over its own. Increasing platform visibility can either raise or lower market-wide prices, depending on which seller is more constrained in lowering prices. The platform’s optimal ranking balances the gain from capturing non-searcher demand against its effect on equilibrium prices. We characterize when self-preferencing benefits or harms consumers and show that regulating toward ranking neutrality can be misleading. In particular, a platform may optimally rank a third-party seller first to soften price competition, even when the commission fee is zero.

Keywords: Self-Preferencing, Online Platforms, Price Dispersion, Consumer Search

JEL Classification: L40, D40