Customer Privacy and Competition

Abstract

We analyze how different degrees of privacy protection affect industry profits, consumer welfare, and total welfare in a model with switching costs. Firms earn higher profits under weak privacy protection compared with strong or no privacy protection. The relationship between the degree of privacy protection and equilibrium profits is not monotonic. Consumer surplus and total welfare increase with the degree of privacy protection unless firms recognize consumer-specific switching costs. In that case, pricing conditional on switching costs has favorable implications for consumer surplus and total welfare.

Keywords: customer privacy, privacy protection, customer recognition, price discrimination, behavior-based pricing

JEL Classification: D4, D82, L1, L4