To Partner or Not to Partner? The Partnership Between Platforms and Data Brokers in Two-Sided Markets

Data have become an important competitive asset, especially for online advertising platforms, leading to the emergence of a new data broker industry. Platforms can partner with data brokers to acquire external data to enhance their targeting capabilities, but this practice has stoked growing 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 increasing consumer privacy concerns caused by the data broker may encourage platforms to partner with the data broker rather than discourage them. The driving force is that, because of negative cross-side network effects from advertisers to consumers, increased privacy concerns can serve as a strategic lever to soften price competition on the advertiser side. However, when both platforms partner with the data broker, a prisoner’s dilemma may arise in equilibrium even when 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, but it may benefit consumer surplus when platforms adopt a mixed model with ad-sponsored and subscription-based revenue. Moreover, our analysis indicates that platforms may not have incentives to adopt high levels of privacy protection and may instead adopt asymmetric privacy protection strategies, with one platform adopting high privacy protection and the other opting for low protection. A series of model extensions confirm the robustness of our key findings. We conclude with a discussion of managerial and policy implications.

History: Juan Feng, Senior Editor; Hong Guo, Associate Editor.

Funding: This work was supported by the National Natural Science Foundation of China [Grants 72301267, 72301264, 72091215/72091210, 71921001] and the China Postdoctoral Science Foundation [Grant 2022M720135].

Supplemental Material: The online appendix is available at https://doi.org/10.1287/isre.2022.0470.