Economics of Analytics Services on a Marketplace Platform

Abstract

Analytics services provided by marketplace platforms have become increasingly important for sellers seeking market insights. In this paper, we examine a scenario in which an analytics service plays a vital role in enhancing sellers’ understanding of market size and improving their decision-making. Using a game-theoretic model, we analyze the pricing strategies of the platform and the adoption strategies of sellers for the analytics service. Our study identifies two distinct effects of analytics services: the competition effect and the accuracy effect. Specifically, the competition effect manifests in opposing ways across different market scenarios, with a competition-intensifying effect in low-demand markets and a competition-weakening effect in high-demand markets. Consequently, sellers using an analytics service command lower prices in low-demand markets and higher prices in high-demand markets. More interestingly, our results reveal that offering an analytics service could potentially hurt the total market demand, subsequently impacting the platform’s revenue from the marketplace service and potentially leaving the platform worse off. Additionally, driven by both the accuracy and competition effects, adopting an analytics service may adversely affect seller profitability and consumer surplus without necessarily improving overall welfare. Moreover, the transaction fee for the marketplace service plays a crucial role in the interplay between the analytics and marketplace services. Specifically, in low-demand (high-demand) markets, as the transaction fee increases, platforms should consider reducing (increasing) the subscription fee to encourage more (fewer) sellers to adopt the analytics service, thereby enhancing overall market demand and increasing revenue from the marketplace service. Our findings also suggest that platforms should refrain from offering analytics services in high-demand markets when the transaction fee is relatively high. Furthermore, policymakers (sellers) should be mindful of the potential negative consequences associated with the adoption of analytics services in high-demand (low-demand) markets.