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 incorporate this endogenous decision into a duopoly model with
behavior-based pricing. We find unique pure-strategy equilibria for two disclosure rules.
Under revelation to both firms, consumers disclose their information and firms price
discriminate. Under revelation to only one firm, consumers hide their information and
firms price uniformly. In our laboratory experiment we confirm these pricing strategies.
Consumers, however, have a higher than predicted disclosure rate which is driven by
learning effects and privacy concern.

Keywords: behavior-based pricing, privacy, laboratory experiment

JEL Classification: C91, D11, D43, L13