Privacy, Information Acquisition, and Market Competition

This paper analyzes how data-driven vertical integration between a platform and one downstream seller affects market outcomes in a two-sided market where sellers with asymmetric targeting skills target advertisements to individuals who have varying privacy concerns. I show that data-driven vertical integration leads to the incumbent's exclusive use of data. Therefore, a market entrant that has worse targeting technology than an incumbent is disproportionately harmed by such integration. The welfare analysis shows that integration can be welfare-reducing if consumers' privacy concerns are relatively high. Therefore, individually optimal decisions on data disclosure might not be socially optimal when aggregated.