Strategic Release of Information in Platforms: Entry, Competition, and Welfare

Abstract

Two-sided platforms play an important role in reducing frictions and facilitating trade, and in doing so they increasingly engage in collecting and processing data about supply and demand. This paper establishes that platforms have an incentive to strategically disclose (coarse) information about demand to the supply side as this can considerably boost their profits. However, this practice may also adversely affect the welfare of consumers. By optimally designing its information disclosure policy, a platform can influence the entry and pricing decisions of its potential suppliers. In general, it is optimal for the platform to disclose its information only partially to either ``nudge'' entry when it is a priori costly for suppliers to join or, conversely, discourage it when suppliers do not have access to attractive outside options. On the other hand, consumers may end up being worse off as they have access to fewer trading options and/or face higher prices compared to when the platform refrains from sharing any demand information to its potential suppliers.

Keywords: Two-sided platforms, information design, competition, consumers welfare

JEL Classification: C73, D82, D83