Privacy Preference,Price Discrimination and Regulations on Consumer Information Protection
How to balance the trade-off between protecting consumer privacy and promoting data values becomes an in-creasingly important issue in the digital era.From the firms'side,consumers'information is valuable for firms'deci-sions.From the consumers'side,disclosing personal information results in privacy concerns.In theory,in a competitive market,when a firm sells products to a consumer in exchange for the customer's information,then such a voluntary trade must be Pareto-improving.In practice,firms do this by offering discounts for those who choose to disclose their informa-tion.However,in a market with imperfect competition where prices are offered strategically by competing oligopolists,the equilibrium outcomes remain unclear.In this paper,we introduce heterogeneous privacy preferences into a horizon-tally differentiated duopoly model,to study the pricing and privacy strategies of competing firms and their impacts on equilibrium welfare.In our model,not only do consumers differ in their heterogeneous preferences over the two brands,but they also dif-fer in their disutilities when disclosing personal information.Each consumer chooses to purchase from a particular seller,and during the trade,he/she must also choose whether or not to disclose his/her personal information.Consumers'infor-mation generates extra value for the firms in addition to profits brought by selling products alone.Sellers offer prices si-multaneously in which the price for those who choose to disclose personal information,and the price for those who do not,are differentiated.Therefore,the privacy strategy of a firm is described by a pair of relative prices.By using a binary distribution(i.e.,when disclosing personal information,some"privacy-sensitive"consumers incur a fixed disutility while the remaining"privacy-insensitive"consumers incur zero disutility),there exist three possible types of privacy agree-ments:(1)if the price for disclosing information is greater than that for not disclosing,then all consumers will choose not to disclose;(2)if the price for not disclosing is greater than the price plus the disutility of information disclosure,then all consumers choose to disclose their information;and(3)when the incremental price for not disclosing information is be-tween zero and the disutility of information disclosure,then the privacy-insensitive consumers will choose to disclose while others do not(i.e.,differential treatment).We show that(1)the agreement that induces"no information disclosure"is strictly dominated by the agreement in which"some consumers disclose while others do not";(2)when the value of information exceeds the disutility of disclos-ing personal information,a symmetric equilibrium emerges where both firms charge high prices(off-equilibrium path)for those who do not disclose to induce all consumers to disclose their information voluntarily;and(3)conversely,firms will charge different prices such that privacy-sensitive consumers choose not to disclose while the privacy-insensitive consum-ers choose to disclose information.For policy implications,we compare the above Nash outcome with some"uniform"regulations:acquiring personal information is not allowed;exchange of personal information is required;and differential treatment is not allowed.We show that when differential treatment becomes an option for firms'strategies,the Nash outcome is more socially desir-able than the outcome under uniform regulations.Compared with the state where acquiring personal information is strictly forbidden,differential treatment brings about additional data value from the privacy-insensitive consumers who are willing to sell their information in exchange for lower prices;compared with the state where personal privacy is not protected,differential treatment allows the privacy-sensitive consumers to choose not to disclose their information.In summary,differential treatment balances the trade-off between protecting consumer privacy and promoting data values.Our model and results contain the following features and insights.First,consumers are provided with a rich set of choices in which both brand and privacy decisions are considered.Consequently,the heterogeneity of consumers'prefer-ences is two-dimensional.Next,the horizontally differentiated duopoly structure allows us to go one step further to specify how rival firms make attractive plans strategically when selling products in exchange for privacy.Besides,the pri-vacy strategy is described by a pair of relative prices,which consists of both the equilibrium price and the price that is on the off-equilibrium path.
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