We value your privacy: Behavior-based pricing under endogenous privacy

Abstract

We study a duopoly model of behavior-based pricing where consumers decide whether they reveal their data or remain anonymous. We contrast two data policies: in an open data policy, revealed data is accessible by both sellers in the market. The unique equilibrium displays that all consumers reveal their data, while firms price discriminate causing welfare losses due to poaching. In an exclusive data policy, revealed data is only accessible by the one firm a consumer bought from. In equilibrium, consumers anonymize, prices are uniform and the market is efficient. We test these contrasting predictions in an experiment. In the open data treatment, subjects predominantly act as predicted. In the exclusive data treatment, buyers initially reveal their data as sellers reward loyalty. Subsequently, buyers adjust more towards anonymization, when sellers begin to employ poaching strategies.

Keywords: behavior-based pricing, privacy, laboratory experiment

JEL Classification: C91, D11, D43, L13