The Effect of User Privacy Concerns on Platform Competition in a Two-sided Market

Many online platforms adopt the ad-sponsored business model in a two-sided market where they provide free services to users while collecting their data, which they use to sell targeted ads to advertisers. However, collecting user data has raised growing privacy concerns. This study develops a two-sided model to examine the impact of user privacy concerns on platform competition by considering multi-homing on both sides. Surprisingly, our result shows that as consumer privacy concern increases, platforms would increase rather than reduce their ad prices. The driving force is that a high privacy concern prompts singlehoming on the user side, which endows platforms with greater exclusive market power on the advertiser side. Moreover, we show that a higher privacy concern may also increase platforms’ market share and profits. Our result reveals that growing privacy concerns may generate anti-competitive effects, thus benefiting platforms.