Information Provision in Two-Sided Platforms: Optimizing for Supply

Abstract

While information design has gained significant attention in the recent literature as a tool for shaping consumers' purchase behavior, little is known about its use and implications in two-sided marketplaces, where both supply and demand consist of self-interested strategic agents. In this paper, we develop a dynamic game-theoretic model of a two-sided platform that allows for heterogeneity and endogenous behavior on both sides of the market. We focus on illustrating the potential benefits of optimal information provision in terms of managing supply-side decisions, including supplier entry/exit and pricing. Our analysis identifies three distinct mechanisms through which information design may increase platform revenues. First, when the outside options available to consumers and service providers are relatively unattractive, information design can be used to mimic the so-called "damaged goods" effect, allowing the platform to fine-tune its composition of providers and achieve a more revenue-efficient matching between supply and demand. Second, when consumers and/or providers have access to relatively attractive outside options, information design can help the platform increase its transaction volume significantly; interestingly, we find that in order to ramp up its throughput, the platform may need to understate the quality of its best providers. Third, when the platform uses commission subsidies to resolve the "cold-start" problem and incentivize the entry of new providers, information design can help achieve the same goal while extracting higher commission revenues; thus, we highlight the role of information design as a substitute for commission subsidies. Overall, our numerical experiments suggest that, by influencing supplier decisions, optimal information provision can lead to a substantial increase in platform revenues.

Keywords: platform operations, information provision, social learning, product line design, gig economy