A Simple Economics of Platform Self-Preferencing

In this paper, we consider a platform that sells both the first-party product and the third-party product. The product recommendation of such a platform is interpreted as cheap talk, because it is unbinding and costless. We show that if the consumer has the outside option to exit from the platform, there exists a partially revealing communicative equilibrium in which the platform makes a biased recommendation with some positive probability while the consumer follows the platform’s self-referencing recommendation with some probability and takes the outside option to exit from the platform with the remaining probability. In this equilibrium, self-preferencing occurs. Thus, the consumer’s exit option is essential to this self-preferencing equilibrium. We also show that both the platform and the consumer are made better off in this partially revealing self-preferencing equilibrium than in an uninformative equilibrium or without using the search engine. We also extend our arguments to the Hotelling model with consumers’ exit option and draw an interesting policy implication that if a platform’s commission fee is regulated, it can increase the platform’s self-preferencing bias.