Welfare implications of information sharing by integrated e-retailers

What is it about?

An integrated e-retailer competes with third-party sellers on the retailer’s platform. Due to its access to consumer data and its analytic capability, the integrated retailer possesses demand information that is not available to third-party sellers. When the information is not shared by the retailer, the third-party sellers make an imprecise estimate. Modelling the competition as a Cournot game, we show that by withholding information the retailer benefits at the cost of the third-party sellers only if the actual demand is more than that estimated by the third-party sellers and is less than a threshold. However, consumers’ surplus increases. The gain in consumers’ surplus may be greater than the retailer’s profit gain, resulting in an increase in social welfare. Increases in the commission rate, the number of third-party sellers, and the wholesale price of the product encourage the retailer to share demand information with the third-party sellers. The insights help integrated retailers decide their information sharing strategy, and the regulators in formulating antitrust laws.

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Why is it important?

The insights obtained in this paper are useful to both the integrated retailers in deciding their information sharing strategy, and the competition regulators for policy formulation. An important question for the competition regulators is whether to make information sharing mandatory. Such a law would go against the consumers who are better off if the retailer withholds information when the third-party sellers underestimate demand. Since the welfare gain due to information withholding can be greater than the retailer’s profit gain, enacting a law that mandates the integrated retailers to share demand information is not necessarily welfare-increasing.