Who Benefits from Online Privacy?

36 Pages Posted: 19 Oct 2008

Date Written: September 1, 2008

Abstract

When firms can identify their past customers, they may use information about purchase histories in order to price discriminate. We present a model with a monopolist and a continuum of heterogeneous consumers, where consumers can opt out from being identified, possibly at a cost. We find that when consumers can costlessly opt out, they all individually choose privacy, which results in the highest profit for the monopolist. In fact, all consumers are better off when opting out is costly. When valuations are uniformly distributed, social surplus is non-monotonic in the cost of opting out and is highest when opting out is prohibitively costly. We introduce the notion of a privacy gatekeeper - a third party that is able to act as a privacy conduit and set the cost of opting out. We prove that the privacy gatekeeper only charges the firm in equilibrium, making privacy costless to consumers.

Keywords: Privacy, price discrimination, anonymity, opt out, e-commerce

JEL Classification: D02, L12, L50

Suggested Citation

Taylor, Curtis and Wagman, Liad, Who Benefits from Online Privacy? (September 1, 2008). NET Institute Working Paper No. 08-26. Available at SSRN: https://ssrn.com/abstract=1286275 or http://dx.doi.org/10.2139/ssrn.1286275

Curtis Taylor (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Liad Wagman

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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