Federated Learning and Free-riding in a Competitive Market

Federated learning (FL) is a collaborative technique for training large-scale models while protecting user data privacy. Despite its substantial benefits, the free-riding behavior raises a major challenge for the formation of FL, especially in competitive markets. Our paper explores this under-explored issue on how the free-riding behavior in a competitive market affects firms' incentives to form FL. Competing firms can improve technologies through forming FL to increase the performance of their products, which in turn, affects consumers' product selection and market size. The key complication is whether the free-riding behavior discourages information contribution by participating firms and results in the decomposition of FL, and even free riding does not discourage information contribution, this does not necessarily mean that a firm wants to form FL in a competitive market because free riding may reshape the competition positions of each participating firm and thus forming FL may not be profitable. We build a parsimonious game theoretical model that captures these interactions and our analyses show several new findings. First, even in the presence of the free-riding behavior, competing firms under FL find it optimal to contribute all its available information. Second, the firm with less amount of information always finds it profitable to free ride; whether its rival (with more amount of information) have an incentive to form FL only when the level of competition or when the gap in information volume is not high. Third, when FL is formed, there exists an "All-Win" situation in which all stakeholders (participating firms, consumers, and social planner) benefit. Last, subsidizing by the free-riding firm can align its rival's incentive to form FL only when the level of competition is intermediate.