Information Design of Online Platforms

We consider the strategic use of information by an online platform to both guide consumer search through its product recommendations and influence sellers' targeting and advertising decisions. The model provides a unified view of personalized product recommendation and targeted advertising on online platforms. We show that by supplying more information, the platform improves match efficiency but reduces sellers' incentives to advertise, which leads to a higher commission but a lower advertising revenue. The optimal information design entails limiting consumer search and mixing the matched product with a long tail of unmatched ones for recommendation.