Information Transparency of Business-to-Business Electronic Markets: A Game-Theoretic Analysis

Abstract

The abundance of transaction data available on the Internet tends to make information more transparent in electronic marketplaces. In such a transparent environment, it becomes easier for suppliers to obtain information that may allow them to infer their rivals’ costs. Is this good news or bad news? In this study, we focus on the informational effects of business-to-business (B2B) exchanges, and explore firms’ incentives to join a B2B exchange that provides an online platform for information transmission. We then study the equilibria by developing a game-theoretic model under asymmetric information. We examine whether the incentives to join a B2B exchange would be different under different competition modes (quantity and price), different information structures, and by varying the nature of the products (substitutes and complements). Our results challenge the “information transparency hypothesis” (i.e., open sharing of information in electronic markets is beneficial to all participating firms). In contrast to the popular belief, we show that information transparency could be a double-edged sword. The individual rationality of participation in the online exchange reflects the tradeoff between information transparency and data confidentiality. This may have important implications for the microstructure design (e.g., data access rules) of B2B electronic marketplaces.