The Welfare Effects of Selling Leads in a Two-Sided Marketplace

Digital platforms that connect customers with service providers often monetize by selling customer leads to interested providers. Examples include Bark, Google Local Services, HomeAdvisor, Modernize, Porch, and Thumbtack. This paper develops a game-theoretic model to analyze how lead pricing affects customer and provider welfare. When the platform raises the fee-per-lead for a customer-type, those customers—conditional on receiving the same number of provider quotes—are quoted lower prices. However, if the fee is sufficiently high, providers purchase fewer of these leads, which can reduce the number of quotes and diminish customer surplus. To maximize social welfare, a simple policy that sets a market-clearing fee-per-lead for each customer-type guarantees at least [Formula: see text] of the first-best welfare and at least [Formula: see text] of the welfare under the welfare-optimal fees. The first-best outcome can be achieved by subsidizing providers for each job well done, so that experienced providers with cheaper sources of leads do not exit the platform. Understanding these welfare trade-offs can help platforms design policies that support balanced marketplace growth and preserve a sustainable revenue stream. This paper was accepted by Srikanth Jagabathula, market design, platform, and demand analytics. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.07399 .