Not all E-Commerce Businesses are Born Equal: Implications for Privacy Regulation

Economists Jorge Padilla, Salvatore Piccolo, Albert Riera and Helder Vasconcelos co-authored an article for Competition Policy International’s Antitrust Chronicle discussing privacy concerns and privacy regulations under two different e-commerce business models: a pure marketplace and a hybrid marketplace. The authors analyse the incentives of digital e-commerce platforms to gather and disclose consumer information and find that those incentives depend on the platform’s business model, the bargaining power of the platform and the strength of competition at that platform.

This article was originally published by Competition Policy International here. The views expressed in this paper are the sole responsibility of the authors and cannot be attributed to Compass Lexecon or any other parties.

Introduction

Digital e-commerce platforms have unambiguously contributed to spreading market coverage by reaching consumers that would otherwise not be served or, at best, would incur rather high search costs to make their purchases. Thanks to their digital and two-sided nature, those platforms have privileged access to a massive amount of user data and often track their users’ online behavior (e.g. browsing patterns, shopping preferences, and even, sometimes, social interactions). The collection and subsequent management of this data is justified by the need to build users’ profiles and efficiently deliver ads to the relevant user segments (a process which has been termed targeting advertising) or to identify missing varieties that consumers would likely value.

Apart from making own use of the collected data, some online platforms may profit by reselling their users’ individual data to third parties, which may then use this information for commercial, marketing, or, in the worst cases, illegal purposes. This naturally gives rise to privacy concerns. Consumers are more likely to express concern about the nature and amount of data a given e-commerce business extracts if they anticipate that such information may be transmitted to third parties, especially if they believe that their information may land in the wrong hands.

Because the success of e-commerce platforms depends on their ability to attract users so that they can then recruit third-party sellers, e-commerce platforms have an incentive to mitigate their users’ privacy concerns by limiting the amount of user information that they acquire and disclose. That user-friendly motivation is in part offset by the platforms’ incentive to monetize their customer bases, which induces them to collect and disclose more information than their users would find optimal. Sellers in a platform will make more money, and the platform will thus obtain higher access fee revenues, if they can price discriminate and/or target their marketing efforts more effectively. That in turn will be easier when the platform collects and discloses more information about its users.

The balance of those two incentives determines the amount of information collected and disclosed. In two recent economic theory papers we find that the precise business organization of an e-commerce platform impacts on its incentives to acquire, process and resell consumer data to third parties. We distinguish two different online business models: the “marketplace model,” where the platform intermediates between sellers and buyers, and charges sellers an access fee; and the “hybrid model,” where the platform acts both as a marketplace and as a retailer operating in that marketplace. The marketplace model is, therefore, a pure intermediation model, whereas in the hybrid model the platform is both an intermediary and a seller.

We find that the platform’s decision to gather and disclose consumers’ information in the two business models crucially depends on (a) the level of intra-platform competition (as measured by the degree of substitutability between the platform’s own private label and the remaining products sold by third-party sellers present in its marketplace), and (b) the platform’s bargaining position vis-à-vis the independent sellers. When intra-platform competition is intense and the platform has significant bargaining power, then it acquires and disseminates less accurate information when operating as a hybrid marketplace.

In this paper we consider the regulatory implications of these findings. More specifically, we assess their implications for the design and implementation of privacy policy. Interventions that may be required for pure intermediation platforms may not be justified when applied to hybrid marketplaces. Because not all multi-sided online businesses are born equal, public policy cannot treat them equally either. Policymakers, both regulators and antitrust authorities, must be aware of these differences and factor them in when designing their policies. Thus, for example, while hybrid marketplaces can be trusted to limit the collection and sharing of end-users’ information in circumstances where that business has significant bargaining power (and may even play a gatekeeper role) and can choose how close its own branded products are to those sold by third-party sellers in the marketplace, this is not the case of pure marketplace platforms.

We also extend the analysis in previous papers to consider the incentives of online ad-platforms to gather and disclose user information; we find that those are necessarily more likely to give rise to privacy concerns. Marketplaces make money from sellers and buyers and their incentives regarding the buyers’ data collection and dissemination reflect both the preferences of sellers and buyers. Instead, online ad-platforms only raise revenue from sellers and, therefore, their incentives are to extract as much data as possible and sell it at the highest possible price without as much monitoring of its use.

In sum, our analysis suggests that the only sensible way of approaching privacy regulation in digital markets is a case-by-case approach, which takes account of the business model at stake, the bargaining power of the platform and the strength of competition at that platform.

Read the CPI Antitrust Chronicle here