Privacy Spillovers and Interoperability in Network Markets

This paper studies the effects of introducing interoperability in the market for messenger services. We model competition between an incumbent service that employs a data-driven business model in exchange for “free” access to the service and a privacy-preserving entrant. On the user side, there are direct network effects and users are privacy-conscious. We characterize market outcomes with and without interoperability. A key feature of the model is that interoperability may induce data or privacy spillovers as user data is transferred across different services. Mandating interoperability can hurt user welfare if these privacy spillovers are sufficiently large. Moreover, the entrant’s market share also decreases when privacy spillovers are large, that is, contestability is limited.