A Model of Data and Data Exchange in Competitive Markets

Companies are increasingly using data to predict behavior, automate and improve the relation with their customers. In this context, data exchange rises important concerns regarding competition, concentration and welfare. This paper presents a novel linear demand model that capture data and information effects in competitive markets, which are summarized in a precision parameter. Subsequently, this modelling approach is applied to study the firms incentives to exchange data and the implications in terms of market variables, welfare and concentration measures. We found that incentives to data exchange between competitor firms emerge providing that the information gains are relatively stronger than the competitor information gains, and the associated strategic correlation effect is not too strong. The results also suggest that market concentration tends to increase after data exchange, but both consumers and producers benefit from it. The reason is that better data allows firms to delivering varieties closer to consumers' needs