Identifying Perverse Incentives in Buyer Profiling on Online Trading Platforms

Information Systems Research 33(2), pp 464-475.

37 Pages Posted: 4 Oct 2017 Last revised: 4 Nov 2022

See all articles by Karthik Natarajan Kannan

Karthik Natarajan Kannan

Purdue University

Rajib L. Saha

Indian School of Business (ISB), Hyderabad

Warut Khern-am-nuai

McGill University - Desautels Faculty of Management

Date Written: September 26, 2021

Abstract

Consumer profiling has become one of the most common practices on online trading platforms. Many platforms strive to obtain and implement technological innovations that allow them to understand and identify consumers’ needs, and, thereafter, monetize this capability by charging sellers to present and/ or sell their products or services based on consumers’ interests. However, an interesting and relevant question arises in this context: Does the platform have an incentive to profile its buyers as accurately as possible? This paper develops and analyzes a parsimonious game-theoretic model to answer this research question. We find that, surprisingly, platforms that charge sellers for discoveries have a perverse incentive to deviate from accurate buyer profiling. However, such a perverse incentive does not exist for platforms that charge sellers for transactions. As a result, with such a perverse incentive, social welfare under discovery-based pricing is lower than that under transaction-based pricing.

Keywords: Trading Platforms, Advertising-Based Model, Commission-Based Model, Generalized Second Price Auctions, Consumer Profiling

Suggested Citation

Kannan, Karthik Natarajan and Saha, Rajib Lochan and Khern-am-nuai, Warut, Identifying Perverse Incentives in Buyer Profiling on Online Trading Platforms (September 26, 2021). Information Systems Research 33(2), pp 464-475., Available at SSRN: https://ssrn.com/abstract=3046625 or http://dx.doi.org/10.2139/ssrn.3046625

Karthik Natarajan Kannan

Purdue University ( email )

Krannert School of Management
West Lafayette, IN 47907
United States

Rajib Lochan Saha (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 111
India

Warut Khern-am-nuai

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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