Endogenous Data Collection in Platform Markets: Privacy and Welfare

Increasingly dominant online platforms are collecting and sharing user data across multiple markets, raising red flags as regards privacy, as well as potential anti-competitive abuses. We analyse competition among two platforms that compete in prices and advertising quantities, with one platform collecting data in a related market where it is dominant. We find that data collection is socially excessive whenever market competition is at an intermediate level, whereas weak competition leads to too little data collection. We then use this framework to examine a possible regulatory approach to privacy protection, i.e. empowering users to control the amount of data that can be collected from them. Surprisingly, we find that in markets where advertising is effectively targetted, but competition is weak, user control of data can increase data collection, thus degrading privacy. In all other markets however privacy improves. We also analyse the welfare implications of such a policy.