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Who Benefits From Online Privacy?

This study investigates the effects of online privacy on price discrimination in e-commerce. It explores the implications of consumer anonymity decisions on pricing strategies and identifies the beneficiaries and losers. The research also discusses the importance of transparency and consumer control in online privacy policies.

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Who Benefits From Online Privacy?

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  1. Liad Wagman, Curtis Taylor, Vincent Conitzer Duke University Who Benefits From Online Privacy?

  2. (Behavioral) Price Discrimination • Common in e-commerce (Dell, Buy, Amazon) • Consumers are not helpless – it can be circumvented • Sellers’ practices mostly follow voluntary guidelines

  3. Towards Policy • Transparency and Consumer Control (FTC, 07) • Online Privacy Bill of Rights (Edward Markey) • Customer Proprietary Network Information (CPNI) • CAN-SPAM Act of 2003 • General direction: make it easier for consumers to obtain anonymity • Key differences from traditional markets: • It is easier for consumers to become anonymous • But, also easier for sellers to store and use consumer data • Is easier-to-obtain anonymity desirable? Who benefits/loses?

  4. Game • Firm(s) and many consumers • 3 Stages: • (1) Identification: past purchases  disclose info • (2) Anonymity Decisions: consumers decide whether to maintain their anonymity • (3) Purchasing & Discrimination: firm has some information about each consumer’s valuation, sets prices accordingly

  5. Literature • Intertemporal Price Discrimination (Stokey 1979, Salant 1989, Riley & Zeckhauser 1983, Salant 1989); • Ratchet Effect(Freixas et al. 1985, Hart & Tirole 1988) • Recognition(Chen 1997, Fudenberg & Tirole 1998 & 2000, Villas-Boas 1999 & 2004, Taylor 2003, Chen & Zhang 2008) • Privacy policies (Taylor 2004, Acquisti & Varian 2005, Calzolari & Pavan 2006, Hann et al. 2007, Bouckaert & Degryse 2008), Survey: Fudenberg & Villas-Boas 2006 • Addressability(McCulloch et al. 1996, Rossi & Allenby 1999, Kim et al. 2001, Elsner el al. 2004, Hui & Png 2006)

  6. Model • Two purchasing periods • Firm produces non-durable good, 0 marginal cost • Continuum of consumers with unit mass • Each period: a consumer can use 1 or 0 units • Consumer’s valuation v drawn from cdf F on [0,1] • Valuation is private info, same in both periods • Costs c to opt out, expended in second period

  7. Extensive Form Sketch

  8. Results Overview • Given • Firm cannot commit to future prices • Technical assumptions • Firm’s profit is non-monotonic, highest when cost of maintaining anonymity is zero • Consumer surplus may increase in the cost of anonymity, but only up to a point • Social surplus, extensions

  9. Preliminaries • Socially optimal: all consumers get a unit in each period • If there is no customer recognition, firm sets the monopoly price p* in each period • If firm can commit to future prices + no anonymity (full recognition)  commits to monopoly prices • If firm can commit to future prices + opting outpossible  still commits to monopoly prices

  10. Characterization • Consumers can opt out at a cost c • Firm tracks purchases, αis the proportion of purchasing consumers maintaining anonymity • Proposition: If c=0, all PBEs have the following properties: • (On path) prices = p* = argmaxp p(1-F(p)) • Consumers with v ≥ p* purchase and opt out (all consumers stay anonymous) • No-recognition outcome • (This is what the firm wants!)

  11. Stage 3: Price Discrimination, c>0 • Anonymous consumers: • Identified consumers: • Ratchet effect:

  12. Stage 2: Choosing Anonymity • For consumers to be willing to mix, • Derive α(p1).

  13. Stage 1: Pricing & Identification • Firm’s first period problem

  14. Comparative Statics (uniform)

  15. Comparative Statics (uniform) When c is deadweight loss When c is collected

  16. Conclusions • Firm benefits from free anonymity • Facilitating opting out can increase and also decrease welfare • Non-monotonicity in surplus, profit • Extensions: competition, opt in, correlated & heterogeneous costs, other benefits to/from identification/privacy, ... Thank you for your attention!

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