Consumer Privacy Concerns, Multihoming, and Platform Competition in Two-Sided Markets

Many online platforms adopt the ad-sponsored business model, which involves offering free services to consumers while collecting their data and selling targeted advertising space to advertisers. However, collecting consumer data has raised growing privacy concerns, which may affect consumers’ homing behavior, i.e., using one platform (i.e., single homing) or multiple platforms (multihoming). This study develops a game-theoretic model to examine how consumer privacy concerns affect platform competition on the advertiser side by focusing on advertising prices, advertiser demand, and platform profits. Our model allows both consumers and advertisers to choose single homing or multihoming endogenously. Our results show that growing privacy concerns can allow platforms to increase their prices because higher privacy concerns can lead to more single homing consumers, who are of higher value to advertisers. Furthermore, we find that the impact of privacy concerns on advertiser demand and platform profits depends on the substitutability of platforms’ targeting capabilities. Surprisingly, even when higher privacy concerns lead to fewer single homing consumers, platforms can attract more advertiser demand and achieve higher profits if they offer highly differentiated targeting options. Finally, we consider the case where platforms use exclusive contracts to lock in advertisers. Counter to the intuition that exclusive contracts tend to favor large platforms, we show that small platforms with lower targeting capability are more likely to benefit. We discuss relevant managerial and theoretical implications.