The Partnership Between Platforms and Data Brokers in Two-sided Markets

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Data has become an important competitive asset, especially for online advertising platforms, and the huge demand for data has spawned a new data broker industry. Platforms usually partner with data brokers to acquire external data to enhance their targeting capabilities, but this practice has stoked consumer privacy concerns. This study develops a game-theoretic model to examine the economic mechanism underlying the partnership between competing platforms and a data broker in a two-sided market. Interestingly, our analysis shows that the increase in consumer privacy concerns caused by the data broker may incentivize platforms to partner with the data broker rather than discouraging them. The driving force is that due to negative cross-side network effects, increased privacy concerns can be a strategic lever to soften price competition on the advertiser side. However, when both platforms partner with the data broker, a prisoner’s dilemma situation may arise in equilibrium even though the data broker can greatly improve the targeting capabilities. We find that the platform-data broker partnership hurts consumer surplus when platforms adopt a pure ad-sponsored model without charging consumers for content, but it may benefit consumer surplus when platforms adopt a mixed model with ad-sponsored and subscription-based revenue. We consider several model extensions to seek additional insights, including the data broker charging an endogenous commission fee and cases where the consumer or advertiser can multihome (join more than one platform). Managerial and policy implications of the findings are discussed.