Role of Consumer Targeting in E-commerce Marketplaces:Sponsored versus Organic Product Listing

E-commerce marketplaces have been slowly replacing organic product listing with sponsored product listing in prominent positions of consumer search results. Marketplaces receive listing fees in addition to sales commission in sponsored listings, whereas they receive only the latter in organic listings. Moreover, marketplaces have access to vast amounts of consumer data which enables the marketplaces to target consumers profitably. We demonstrate that consumer targeting plays a central role in how the listing type affects various stakeholders. We show that marketplaces indeed have an incentive to switch to sponsored product listing from organic product listing, even though such a switch intensifies the price competition between sellers and reduces the marketplaces’ sales commission. The more intense price competition between sellers benefits consumers, but it, along with the listing fees, hurts sellers. The marketplace’s switch to the sponsored product listing hurts the social welfare by increasing the mismatch between preferred and purchased products for some consumers. The primary driver of these impacts is that the marketplaces’ incentive to precisely target consumers diminishes if they switch to sponsored product listing. An improvement in the targeting precision softens the price competition between sellers as well as the competition between them for the desirable slot in sponsored product listing; while the former effect increases the marketplace’s sales commission,the latter effect decreases listing fees. Therefore, when sales commission is the sole revenue source, as in the case of organic product listing, marketplaces have a higher incentive to improve targeting precision compared to when listing fees is also a revenue source, as in the case of sponsored product listing.