An Economic Model of Privacy: a Property Rights Approach to Regulatory Choices for Online Personalization

Abstract

The market for consumers' personal and preference information is growing as a result of both advances in information-acquisition technologies and increasing strategic importance of this information. Through a formal economic model of consumers' personalization-for-privacy (p4p) tradeoff, we examine welfare implications by characterizing consumption utilities as "no-free-disposal" functions. We investigate the optimality of four regulatory regimes (through allowance/dis-allowance of usage-enforcing technologies and private contracts) by analyzing the strategic interaction between a monopolist who offers personalization services "free-of-charge" and two consumer types - privacy and convenience seekers who have property rights over their preference information. Broadly our research suggests that we cannot simply extend the regulatory policy recommendations from a traditional goods monopoly to our context of information monopolies. While prior findings of monopoly markets might suggest a curtailment in vendor power, counter to intuition our results suggest that the entire market is better off when both private contracts and usage enforcement are allowed by the regulator. However, when private contracts are proscribed, the regulator should also prevent the deployment of usage-enforcing technologies when the consumers' p4p lags behind advances in these technologies. Interestingly, unlike traditional price-instrument markets for goods with free disposal, a regulator should not only encourage this market's knowledge of consumers' p4p preferences but also the various uses and benefits of preference information to the vendor.

Keywords: Economic modeling, personalization, privacy, incentives, Nash bargaining, social welfare

JEL Classification: D42, D82