Customer Information Sharing Among Rival Firms

Abstract

The recent rapid growth of the Internet as a medium of communication and commerce, combined with the development of sophisticated software tools, are to a large extent responsible for producing a new kind of information: databases with detailed records about consumers' preferences. These databases have become part of a firm's assets, and as such they can be sold to third parties. This possibility has raised numerous concerns from consumer privacy advocates and regulators, who have entered into a heated debate with business groups and industry associations about whether the practice of customer information sharing should be banned, regulated, or left unchecked. This paper investigates the incentives of rival firms to share their customer-specific information and evaluates the welfare implications if such exchanges are banned, in the context of a perfect price discrimination model.

Keywords: Customer information sharing, horizontal and vertical differentiation, perfect price discrimination

JEL Classification: D43, L13, O30