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This paper examines online platforms' incentives to protect their users' privacy, when users value the latter and the platforms' incentives arise through purely reputational concerns. The main question addressed is whether the introduction of a competing platform will increase effort incentives, relative to the monopoly case. When revenue is linear in market share and users' utilities are given by the Hotelling specification, I find that effort is reduced in the duopoly equilibrium. This is because in a duopoly setting, the expected increase in market share achieved through a high reputation is reduced. When the rewards-to-reputation function is sufficiently concave, the value of an increase in market share becomes larger for lower market shares and competition can increase effort incentives. I show that this "concavity" effect arises as the effect of platform popularity, when users' preferences favor one platform relative to the other and as the effect of decreasing marginal value of data, when users' data is used to estimate population parameters. Allowing platforms to respond to their posterior reputations through additional choice variables increases the convexity of the rewards-to-reputation mapping, thus worsening the impact of competition on effort incentives. I demonstrate this intuition by analyzing two-sided platform competition. |
