WHO BENEFITS FROM ONLINE PRIVACY?

Curtis Taylor () and Liad Wagman ()
Additional contact information
Curtis Taylor: Department of Economics, Duke University, http://www.duke.edu/~crtaylor/
Liad Wagman: Illinois Institute of Technology, http://mypages.iit.edu/~lwagman/Home.html

No 08-26, Working Papers from NET Institute

Abstract: When firms can identify their past customers, they may use information about purchase histories in order to price discriminate. We present a model with a monopolist and a continuum of heterogeneous consumers, where consumers can opt out from being identified, possibly at a cost. We find that when consumers can costlessly opt out, they all individually choose privacy, which results in the highest profit for the monopolist. In fact, all consumers are better off when opting out is costly. When valuations are uniformly distributed, social surplus is non-monotonic in the cost of opting out and is highest when opting out is prohibitively costly. We introduce the notion of a privacy gatekeeper --- a third party that is able to act as a privacy conduit and set the cost of opting out. We prove that the privacy gatekeeper only charges the firm in equilibrium, making privacy costless to consumers.

Keywords: Privacy; price discrimination; anonymity; opt-out; e-commerce (search for similar items in EconPapers)
JEL-codes: C73 D81 D82 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2008-09
New Economics Papers: this item is included in nep-mkt
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