Data Tracking under Competition

Operations Research (forthcoming)

132 Pages Posted: 22 Mar 2021 Last revised: 4 May 2023

See all articles by Kostas Bimpikis

Kostas Bimpikis

Stanford Graduate School of Business

Ilan Morgenstern

Stanford Graduate School of Business

Daniela Saban

Stanford Graduate School of Business

Date Written: February 25, 2021

Abstract

We explore the welfare implications of data-tracking technologies that enable firms to collect consumer data and use it for price discrimination. The model we develop centers around two features: competition between firms and consumers' level of sophistication. Our baseline environment features a firm that can collect information about the consumers it transacts with in a duopoly market, which it can then use in a second, monopoly market. We characterize and compare the equilibrium outcomes in three settings: (i) an economy with myopic consumers, who, when making purchase decisions, do not internalize the fact that firms track their behavior and use this information in future transactions, (ii) an economy with forward-looking consumers, who take into account the implications of data tracking when determining their actions, and (iii) an economy where no data-tracking technologies are used due to technological or regulatory constraints. We find that the absence of data tracking may lead to a decrease in consumer surplus, even when consumers are myopic. Importantly, this result relies critically on competition: consumer surplus may be higher when data-tracking technologies are used only when multiple firms offer substitutable products.

Keywords: competition, privacy, consumer data, game theory

JEL Classification: C72, D43, D61, D82, D83

Suggested Citation

Bimpikis, Kostas and Morgenstern, Ilan and Saban, Daniela, Data Tracking under Competition (February 25, 2021). Operations Research (forthcoming), Available at SSRN: https://ssrn.com/abstract=3808228 or http://dx.doi.org/10.2139/ssrn.3808228

Kostas Bimpikis

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Ilan Morgenstern (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, 94305
United States

Daniela Saban

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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