Privacy, Economics, and Price Discrimination on the Internet

The rapid erosion of privacy poses numerous puzzles. Why is it occurring, and why do people care about it? This paper proposes an explanation for many of these puzzles in terms of theincreasingimportanceofpricediscrimination.Privacyappearstobedeclininglargelyinorderto facilitatedifierentialpricing,whichofiersgreatersocialandeconomicgainsthanauctionsorshopping agents.Thethesisofthispaperisthatwhatreallymotivatescommercialorganizations(eventhough theyoftendonotrealizeitclearlythemselves)isthegrowingincentivetopricediscriminate,coupled with the increasing ability to price discriminate. It is the same incentive that has led to the airline yield management system, with a complex and constantly changing array of prices. It is also the same incentive that led railroads to invent a variety of price and quality difierentiation schemes in the19thcentury.Privacyintrusionsservetoprovidetheinformationthatallowssellerstodetermine buyers'willingnesstopay.Theyalsoallowmonitoringofusage,toensurethatarbitrageisnotused tobypassdiscriminatory pricing. Economically, price discrimination is usually regarded as desirable, since it often increases the e-ciency of the economy. That is why it is frequently promoted by governments, either through explicit mandates or through indirect means. On the other hand, price discrimination often arouses strongopposition fromthe public. Thereisnoeasyresolutiontothecon∞ictbetweensellers'incentivestopricediscriminateandbuyers' resistance to such measures. The continuing tension between these two factors will have important consequencesforthenatureoftheeconomy.Itwillalsodeterminewhichtechnologieswillbeadopted widely. Governments will likely play an increasing role in controlling pricing, although their roles willcontinuetobeambiguous.Sellersarelikelytorelytoanevengreaterextentontechniquessuch as bundling that will allow them to extract more consumer surplus and also to conceal the extent of price discrimination. Micropayments and auctions are likely to play a smaller role than is often expected.Ingeneral,becauseofstrongcon∞ictingpressures,privacyislikelytoproveanintractable problemthat will be prominentonthe the public agendaforthe foreseeable future.