Information Design of Online Platforms

Abstract

We consider the strategic use of information by an online platform to both guide consumers' search through product recommendations and influence sellers' targeted advertising decision. Our model unifies the analysis of personalized product recommendation and targeted advertising under the information design framework. We illustrate a fundamental tradeoff facing the platform between increasing trades through higher match efficiency and extracting seller surplus by inducing their competition for prominence. The optimal information design may be socially inefficient, as it balances the tradeoff by limiting consumer search and mixing the matched product with a long tail of unmatched ones for recommendation.