Identifying Perverse Incentives in Buyer Profiling on Online Trading Platforms

With advance machine learning and artificial intelligence models, the capability of online trading platforms to profile consumers to identify and understand their needs has substantially increased. In this study, we use an analytical model to study whether these platforms have an incentive to profile their customers as accurately as possible. We find that “payments-for-transactions” platforms (i.e., platforms that charge for transactions that occur on the platform) indeed have such incentives to accurately profile the customers. However, surprisingly, “payments-for-discoveries” platform (i.e., platforms that charge customers for discoveries) have a perverse incentive to deviate from accurate consumer profiling. Our study provides insights into underlying mechanisms that drive this perverse incentive and discuss circumstances that lead to such a perverse incentive.