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  • January 2015
  • Article
  • Management Science

Competing with Privacy

By: Ramon Casadesus-Masanell and Andres Hervas-Drane
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Abstract

We analyze the implications of consumer privacy for competition in the marketplace. We consider a market where firms set prices and disclosure levels for consumer information, and consumers observe both before deciding which firm to patronize and how much information to provide. The provision and disclosure of information presents tradeoffs for all market participants. Consumers benefit from providing information to the firm, as this increases the utility they derive from the service, but they incur disutility from information disclosure. This, in turn, benefits the firm providing an additional source of revenue, but reduces consumer demand for the service. We characterize equilibrium information provision, disclosure levels, and prices and show that competition with privacy has several effects on the marketplace. First, competition drives the provision of services with a low level of disclosure. Second, competition ensures that services with a high level of disclosure subsidize consumers. Third, firms maximize profits at the extensive rather than the intensive margin, outperforming competitors by attracting a larger customer base. And fourth, higher competition intensity need not improve consumer privacy when consumers exhibit low willingness to pay. Our findings are particularly relevant to the business models of Internet firms and contribute to inform the regulatory debate on consumer privacy.

Keywords

Information Acquisition; Information Disclosure; Online Privacy; Privacy Regulation; Information; Rights; Internet and the Web; Competition; Internet and the Web; Corporate Disclosure; Ethics; Knowledge Acquisition

Citation

Casadesus-Masanell, Ramon, and Andres Hervas-Drane. "Competing with Privacy." Management Science 61, no. 1 (January 2015): 229–246.
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About The Author

Ramon Casadesus-Masanell

Strategy
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