Hide and Seek: Costly Consumer Privacy in a Market with Repeat Purchases

When a firm can recognize its previous customers, it may use information about their past purchases to price discriminate. We study a model with a monopolist and a continuum of heterogeneous consumers, where consumers have the ability to maintain their anonymity and avoid being identified as past customers, possibly at a cost. When consumers can freely maintain their anonymity, they all individually choose to do so, which results in the highest profit for the monopolist. Increasing the cost of anonymity can benefit consumers but only up to a point, after which the effect is reversed. We show that if the monopolist or an independent third party controls the cost of anonymity, it often works to the detriment of consumers.

[1]  C. Narasimhan.  A Price Discrimination Theory of Coupons , 1984 .

[2]  Vitaly Shmatikov,et al.  How To Break Anonymity of the Netflix Prize Dataset , 2006, ArXiv.

[3]  Klaus M. Schmidt.  Commitment Through Incomplete Information in a Simple Repeated Bargaining Game , 1993 .

[4]  J. Laffont,et al.  THE DYNAMICS OF INCENTIVE CONTRACTS , 1988 .

[5]  Susan Athey,et al.  Upgrades, Trade-ins, and Buy-backs , 1997 .

[6]  R. Coase.  Durability and Monopoly , 1972, The Journal of Law and Economics.

[7]  Z. John Zhang,et al.  Pay to Switch or Pay to Stay: Preference-Based Price Discrimination in Markets with Switching Costs , 2000 .

[8]  J. Tirole,et al.  Contract Renegotiation and Coasian Dynamics , 1988 .

[9]  Kai Lung Hui,et al.  Overcoming Online Information Privacy Concerns: An Information-Processing Theory Approach , 2007, J. Manag. Inf. Syst..

[10]  Yuxin Chen,et al.  Consumer Addressability and Customized Pricing , 2001 .

[11]  Drew Fudenberg,et al.  Upgrades, Tradeins, and Buybacks , 1998 .

[12]  Curtis R. Taylor.  Consumer Privacy and the Market for Customer Information , 2004 .

[13]  S. Salant.  When is Inducing Self-Selection Suboptimal for a Monopolist? , 1989 .

[14]  H. Varian,et al.  Conditioning Prices on Purchase History , 2005 .

[15]  Y. Spiegel.  Commercial Software, Adware, and Consumer Privacy , 2013 .

[16]  Tobias Regner,et al.  Voluntary payments, privacy and social pressure on the Internet: A natural field experiment , 2012 .

[17]  Lars Stole.  Price Discrimination and Competition , 2007 .

[18]  D. Fudenberg,et al.  Behavior-Based Price Discrimination and Customer Recognition , 2007 .

[19]  Z. John Zhang,et al.  Competitive One-to-One Promotions , 2002, Manag. Sci..

[20]  Z. John Zhang,et al.  Dynamic targeted pricing with strategic consumers , 2009 .

[21]  Avi Goldfarb,et al.  Privacy Regulation and Online Advertising , 2010, Manag. Sci..

[22]  J. Tirole,et al.  Planning Under Incomplete Information and the Ratchet Effect. , 1985 .

[23]  William E. Simon,et al.  Pay to Switch or Pay to Stay : Preference-Based Price Discrimination in Markets with Switching Costs , 2002 .

[24]  Lars Peter Hansen,et al.  Advances in Economics and Econometrics: Theory and Applications, Eighth World Congress , 2003 .

[25]  Z. John Zhang,et al.  Competitive Coupon Targeting , 1995 .

[26]  D. Fudenberg,et al.  Customer Poaching and Brand Switching , 2000 .

[27]  Curtis R. Taylor,et al.  Supplier Surfing: Competition and Consumer Behavior in Subscription Markets , 1999 .

[28]  Alexandre de Corniere,et al.  Online Advertising and Privacy , 2014 .

[29]  J. Miguel Villas-Boas,et al.  Dynamic Competition with Customer Recognition , 1999 .

[30]  Hugo M. Mialon,et al.  The Effects of the Fourth Amendment: An Economic Analysis , 2007 .

[31]  R. Esteves,et al.  A Survey on the Economics of Behaviour-Based Price Discrimination , 2009 .

[32]  Vitaly Shmatikov,et al.  Robust De-anonymization of Large Sparse Datasets , 2008, 2008 IEEE Symposium on Security and Privacy (sp 2008).

[33]  Z. John Zhang,et al.  Individual Marketing with Imperfect Targetability , 2000 .

[34]  J. Miguel Villas-Boas,et al.  Price Cycles in Markets with Customer Recognition , 2004 .

[35]  Yongmin Chen,et al.  Paying Customers to Switch , 1997 .

[36]  Peter E. Rossi,et al.  The Value of Purchase History Data in Target Marketing , 1996 .

[37]  Eitan Gerstner,et al.  Profitable Pricing When Market Segments Overlap , 1986 .

[38]  Alessandro Acquisti,et al.  Identity Management, Privacy, and Price Discrimination , 2008, IEEE Security & Privacy.

[39]  Alessandro Pavan,et al.  On the Optimality of Privacy in Sequential Contracting , 2006, J. Econ. Theory.

[40]  Yongmin Chen,et al.  Marketing Innovation , 2006 .

[41]  Hing-Man Leung,et al.  Intertemporal Price Discrimination , 2000 .

[42]  Andrew M. Odlyzko,et al.  Privacy, economics, and price discrimination on the Internet , 2003, ICEC '03.

[43]  Sanjoy Paul,et al.  Anonymous credit cards , 1994, CCS '94.

[44]  Alessandro Acquisti,et al.  Predicting Social Security numbers from public data , 2009, Proceedings of the National Academy of Sciences.

[45]  Mark Armstrong,et al.  Consumer Protection and the Incentive to Become Informed , 2009 .

[46]  K. Sudhir,et al.  Optimal Marketing Strategies for a Customer Data Intermediary , 2007 .

[47]  Benjamin E. Hermalin,et al.  Privacy, property rights and efficiency: The economics of privacy as secrecy , 2006 .

[48]  Ganesh Iyer,et al.  Research Note Consumer Addressability and Customized Pricing , 2002 .

[49]  Luc Wathieu,et al.  Marketing and Privacy Concerns , 2006 .

[50]  Aaron Roth,et al.  Selling privacy at auction , 2010, EC '11.

[51]  M. Armstrong.  Recent developments in the economics of price discrimination , 2006 .

[52]  R. Pieters,et al.  Working Paper , 1994 .

[53]  D. Fudenberg,et al.  Chapter 7 Behavior-Based Price Discrimination and Customer Recognition , 2006 .