Data-Driven Hold-Up and Relational Contracts

Abstract

Online sellers often face holdup problems that occur when a platform abuses data advantages to compete against them in the product market, leaving them with lower incentives to invest in product innovation. This paper explores the role of relational contracts in solving such conflicts. In each period, a seller decides whether to remain on a platform and, if so, how much to invest in upgrading their product, which will depreciate without continuous investment from the seller. Then, the platform decides whether to copy the seller's product. If the platform chooses to copy, both parties engage in competition; otherwise, they share the monopoly profit. We show that the efficiency of a relational contract depends critically on the seller's outside option and the product depreciation factor. Specifically, the outside option has discontinuous and nonmonotonic effects on efficiency, suggesting that higher outside options, including higher offline market values, may not benefit online sellers. Furthermore, the product depreciation factor can exert opposite effects on efficiency, depending on whether the platform copies the seller off-path.

Keywords: Data-Driven Hold-Up, Relational Contracts, Platform Governance

JEL Classification: D42, D86, L14