Consumers' Privacy Choices in the Era of Big Data
CentER Discussion Paper No. 2018-012
57 Pages Posted: 11 Apr 2018 Last revised: 1 Jun 2018
Date Written: April 9, 2018
Recent progress in information technologies provides sellers with detailed knowledge about consumers' preferences, approaching perfect price discrimination in the limit.We construct a model where consumers with less strategic sophistication than the seller's pricing algorithm face a trade-off when buying. They choose between a direct, transaction cost-free sales channel and a privacy-protecting, but costly, anonymous channel. We show that the anonymous channel is used even in the absence of an explicit taste for privacy if consumers are not too strategically sophisticated. This provides a micro-foundation for consumers' privacy choices. Some consumers benefit but others suffer from their anonymization.
Keywords: Privacy, Big Data, Perfect Price Discrimination, Level-k thinking
JEL Classification: L11, D11, D83, D01, L86
Suggested Citation: Suggested Citation