Abstract
We study how regulating data usage impacts innovation in digital markets. Platforms commonly use proprietary data about third-party sellers to inform their own competing offerings, dampening incentives for innovation. We model this interaction and characterize how data usage restrictions reshape these incentives. An outright ban on data usage may boost or curtail innovation, depending on the thickness of the right tail of demand for new products. More flexible rules controlling when and what data are made available can always improve the effectiveness of regulation. Our results contribute to an ongoing policy discussion regarding competition in digital markets.