The Value of Personal Information in Online Markets with Endogenous Privacy

Abstract

We investigate the effects of price discrimination on prices, profits, and consumer surplus when (a) at least one competing firm can use consumers' private information to price discriminate yet (b) consumers can prevent such use by paying a "privacy cost". Unlike a monopolist, competing duopolists do not always benefit from a higher privacy cost because each firm's profit decreases-and consumer surplus increases-with that cost. Under such competition, the optimal strategy for an owner of consumer data is selling to only one firm, thereby maximizing the stakes for rival buyers. The resulting inefficiencies imply that policy makers should devote more attention to discouraging exclusivity deals and less to ensuring that consumers can easily protect their privacy.20 Under indifference, consumers buy from the informed firm (which we are assuming is firm A).

Selling Strategic Information in Digital Competitive Markets

“…Proposition 1 contrasts with the result established by Montes, Sand-Zantman and Valletti (2018) who find that it is always optimal to sell information to only one firm.…”

“…First, the profit of the data brokers found in Montes, Sand-Zantman and Valletti (2018) (w 1 ) is higher than in our model (w 1 ):…”

“…8 This assumption is also made by Braulin and Valletti (2016) and Montes, Sand-Zantman and Valletti (2018).…”

“…Moldovanu (2000), Montes, Sand-Zantman and Valletti (2018) assume that firms acquire information through a second-price auction with negative externalities.…”

“…Second, Montes, Sand-Zantman and Valletti (2018) implicitly assume that it is optimal for the data broker to sell all segments to firms, which increases in turn competition. In our framework, the data broker finds it optimal to leave low-valuation consumers unidentified, i.e., those who have a low willingness to pay, to soften competition between competing firms.…”