We Value Your Privacy: Behavior-Based Pricing Under Endogenous Privacy

Abstract

This paper analyzes consumers' privacy choice concerning their data and firms' ensuing pricing strategies. Consumers decide whether to reveal private information in form of cookies. We study this endogenous decision in a duopoly model with behavior-based pricing and conduct an experiment to test our theoretical predictions. Contrasting two data environments, we derive a unique pure-strategy pooling equilibrium for each environment. We find that all consumers share their data in an open data environment while no consumers share data in an exclusive environment. In the experiment, however, some subjects readily share their data in the exclusive treatment. In the open data treatment subjects predominantly act as predicted by our theory. A mandated data sharing policy among firms leads consumers to share more data and increases consumer welfare. This helps policy makers to make an informed decision about data protection policies.

Keywords: behavior-based pricing, privacy, laboratory experiment

JEL Classification: C91, D11, D43, L13