30 Under 30 2024

Digital marketplaces have incentives to keep sellers in the dark

Online platforms that match consumers may strategically withhold information about supply and demand to maximize returns

Published: Jul 18, 2023 03:39:29 PM IST
Updated: Jul 18, 2023 03:45:06 PM IST

Digital marketplaces have incentives to keep sellers in the darkMarketplace platforms have a monopoly on details about who’s buying and selling what. Image: Shutterstock

The last time you jumped in an Uber, stayed at an Airbnb, or bought something on Etsy, you probably didn’t think about what kind of information the platform shares with the people selling their products and services to you.

Yet that’s a question of great interest to Stanford Graduate School of Business researchers Kostas Bimpikis and Giacomo Mantegazza. They study the implications of information-sharing in online marketplaces, which collectively generated an estimated $40 billion in sales in 2022. In particular, they’d like to know how platforms decide to release or withhold data about demand and how that affects sellers and buyers.

“When we think about platform design, most of the discussion is usually around pricing and the platform’s ability to reduce frictions associated with otherwise difficult transactions,” says Bimpikis, an associate professor of operations, information, and technology. “But we also wanted to think about how the platform should best share information it has, such as about demand, with other stakeholders.”

Conventional wisdom suggests that markets function best when buyers and sellers have access to as much information as possible. But the companies that operate two-sided marketplaces have an incentive not to share everything they know with their users. They may choose to strategically withhold some information if they see the potential to increase profit.

As an example, Bimpikis mentions Etsy, where users sell handmade and custom-designed products. The site, he says, “may have information about the demand in a particular category — like custom tablecloths or Christmas tree ornaments — and needs to decide how to share that information with merchants.” If the platform informs sellers that a particular item is in high demand, presumably they would rush to make more, increasing supply and decreasing the price — boosting sales yet shrinking the site’s commission, typically a percentage of the sale price.

Faced with a similar scenario, a platform might opt not to reveal what it knows about the current state of its marketplace. “We find platforms hide certain information under some circumstances to protect their profits, and that ultimately hurts customers,” Bimpikis says.

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A Marketplace of Information

“We looked at information-sharing because it’s a lever a platform can pull quickly and adjust to different market conditions,” says Mantegazza, a doctoral student in operations, information, and technology. “Information is a flexible tool that has been somewhat overlooked.”

Bimpikis and Mantegazza designed a model-based study to understand how platforms might share information about expected demand with sellers and how, in turn, that affects whether sellers are willing to sell their goods or services on the platform, and at what volume. The researchers take a profit-maximizing view of platforms in the model, as Bimpikis explains: “The platform is an intermediary between the two sides of the market and acts in its own interest. We don’t believe all platforms act this way, but we want to illustrate the adverse effect of information-provision policies when profit maximization is the incentive.

The model confirms that platforms could share or withhold information to enhance their returns, which are usually based on charging a commission for each transaction. “The platform may see demand will be high for an item,” Mantegazza says, “but tell sellers it doesn’t have a very good forecast, omitting that information to keep available inventory low for the product and keep prices and profits high.”

If a platform recognizes that inventory for a particular product or service is low, it may withhold that information from sellers to motivate more of them to offer the item. “This increases their profit because there will be more people selling the product on the platform than there might have been otherwise, even if demand is low,” Mantegazza says.

“The platform can benefit from high-price transactions when demand is high and from more transactions when demand is low, by deciding how to share information,” Bimpikis says.

The Price of Less Disclosure

That’s good and bad news for the platform’s customers.

On one hand, they may pay a higher price when information about high demand is withheld from sellers, which stifles competition and restricts supply. On the other hand, when a platform doesn’t share information about low demand, buyers benefit from being able to participate in “more transactions when there wouldn’t have been any,” Bimpikis says.

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What do these findings mean for the three parties with a stake in these digital marketplaces: the platform owners, sellers, and customers?

Mantegazza suggests that consumers could be apprised of these behind-the-scenes dynamics and their effects. “They should be made aware the platforms may use information to optimize supply and take more of their money,” he says. “The platforms can use the levers they wish to, but should know there may be some backlash. If they make consumers worse off in the short run, they may lose them in the long run.”

Sellers, meanwhile, should be wary of depending solely on a platform for information about market factors such as expected demand. “If they can receive market intelligence from other companies, they might be able to form a more accurate view and act in their own interest,” Mantegazza says.

“Merchants should also recognize that whatever information they are given, competitors also have this information,” Bimpikis adds. “So if they are told there will be high demand for Product X, that doesn’t necessarily mean they should shift all production to that product because everybody might be doing that.” That underscores the notion that sellers must look out for themselves and craft strategy using as much information as possible.

In the end, Bimpikis says, it’s important to recognize that marketplace platforms have a monopoly on information about who’s buying and selling what. “Platforms can use the information they have at their disposal for their own benefit, and this is not always going to lead to a win-win outcome.”

This piece originally appeared in Stanford Business Insights from Stanford Graduate School of Business. To receive business ideas and insights from Stanford GSB click here: (To sign up : https://www.gsb.stanford.edu/insights/about/emails ) ]

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