Consumer Profiling with Data Requirements: Structure and Policy Implications

52 Pages Posted: 9 Apr 2016 Last revised: 18 Sep 2019

See all articles by Tommaso M. Valletti

Tommaso M. Valletti

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Jiahua Wu

Imperial College Business School

Date Written: August 30, 2019

Abstract

We consider a model where a monopolist can profile consumers in order to price discriminate among them, and consumers can take costly actions to protect their identities and make the profiling technology less effective. A novel aspect of the model consists in the profiling technology: the signal that the monopolist gets about a consumer's willingness-to-pay can be made more accurate either by having more consumers revealing their identities, or by spending larger amounts of money (e.g., on third-party complementary data or data analytics capabilities). We show that both consumer surplus and social welfare are convex in the ability of consumers to conceal their identities. The interest of this result stems from the fact that consumers' concealing cost can be interpreted as a policy tool: a stricter privacy law would make the concealing cost lower, and vice-versa. Consequently, a policymaker who promotes total welfare should either make data protection very easy or very costly. The right direction of data regulations depends on data requirements. In particular, a higher (lower) data requirement is an instance when more (less) consumers are needed to achieve the same signal precision. We show that a strict data privacy law is preferable under a high data requirement so that firms are less likely to invest in profiling inefficiently, whereas there is less concern with little or no data regulations under a low data requirement. We also discuss when greater data protection may be beneficial to the firm.

Keywords: profiling, privacy, price discrimination, signal accuracy, big data

JEL Classification: C72; D11; D42; D62; D82; D83

Suggested Citation

Valletti, Tommaso M. and Wu, Jiahua, Consumer Profiling with Data Requirements: Structure and Policy Implications (August 30, 2019). Available at SSRN: https://ssrn.com/abstract=2760276 or http://dx.doi.org/10.2139/ssrn.2760276

Tommaso M. Valletti

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jiahua Wu (Contact Author)

Imperial College Business School ( email )

Tanaka Building
South Kensington Campus
London, SW7 2AZ
United Kingdom
02075949851 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/j.wu

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
224
Abstract Views
946
rank
141,577
PlumX Metrics