'Sherlocking' and Platform Information Policy

Abstract

Platform-run marketplaces may exploit third-party sellers' data to develop competing products, but the threat of future competition can deter sellers' entry. We explore how this trade-off affects the platform's entry on the marketplace and the referral fee it charges to the third-party sellers. We first characterize the platform's optimal fee under different degrees of commitment on its own entry policy. We show that full commitment maximizes not only the platform's payoff but also consumer surplus, as the associated fee induces maximal entry by the sellers. Next, we show how and when the platform's policy on information sharing between its marketplace and product divisions can substitute for its commitment to entry. We characterize the platform's optimal information policy and examine how it interacts with the platform's fee structure. We show that an outright ban on information sharing between the platform’s divisions can reduce consumer welfare as it may lead to a higher referral fee that thwarts sellers’ entry. Our findings highlight the importance of considering the platform's fee structure as a strategic response in the policy debates on marketplace regulation.

Keywords: Referral fee, Information design, Platform marketplace, Entry

JEL Classification: D82, D42, L1