Opt in Versus Opt Out: A Free-Entry Analysis of Privacy Policies

CESifo Working Paper Series No. 1831

CentER Discussion Paper No. 2006-96

31 Pages Posted: 24 Oct 2006

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Jan Bouckaert

University of Antwerp - Department of Economics

Date Written: September 2006

Abstract

There is much debate on how the flow of information between firms should be organized, and whether existing privacy laws should be amended. We offer a welfare comparison of the three main current policies towards consumer privacy - anonymity, opt in, and opt out - within a two-period model of localized competition. We show that when consumers find it too costly to opt in or opt out, privacy policies shape firms' ability to collect and use customer information, and affect their pricing strategy and entry decision differently. The free-entry analysis reveals that social welfare is non-monotonic in the degree of privacy protection. Opt out is the socially preferred privacy policy while opt in socially underperforms anonymity. Consumers never opt out and choose to opt in only when its cost is sufficiently low. Only when opting in is cost-free do the opt in and opt out privacy policies coincide.

Keywords: privacy, price discrimination, monopolistic competition, welfare

JEL Classification: D11

Suggested Citation

Degryse, Hans and Bouckaert, Jan, Opt in Versus Opt Out: A Free-Entry Analysis of Privacy Policies (September 2006). CESifo Working Paper Series No. 1831; CentER Discussion Paper No. 2006-96. Available at SSRN: https://ssrn.com/abstract=939511

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jan Bouckaert (Contact Author)

University of Antwerp - Department of Economics ( email )

Prinsstraat 13
Antwerp, B-2000
Belgium
+32 3 220 4055 (Phone)

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