27 Pages Posted: 20 May 2020
Date Written: April 23, 2020
We develop a dynamic model in which data enhances firms’ productivity, but erodes privacy. Market structure is determined endogenously by actions taken by firms to acquire private information contained in digital payments. There are two possibilities: a market structure in which firms acquire limited customer data and split the market, and a monopoly outcome in which a single firm obtains all of the customer data and serves the entire market. Total surplus is greatest under a data monopoly, but individual consumers capture only a small fraction the surplus generated from their collective data. The introduction of an anonymous means of digital payment, or digital cash, improves the welfare of consumers in the monopoly outcome by enabling them to monetize their private information. Under a split-market structure, digital cash erodes firms' ability to accumulate data and can lower both total and consumer surplus. We discuss the potential role of central banks in providing digital cash.
Keywords: Customer data, privacy, market structure, digital cash, payments
JEL Classification: E42, L11, L15
Suggested Citation: Suggested Citation