Who Benefits From Online Privacy?

1. Liad Wagman, Curtis Taylor, Vincent Conitzer Duke University Who Benefits From Online Privacy?

2. (Behavioral) Price Discrimination • Common in e-commerce (Dell, Buy, Amazon) • Consumers are not helpless – it can be circumvented • Sellers’ practices mostly follow voluntary guidelines

3. Towards Policy • Transparency and Consumer Control (FTC, 07) • Online Privacy Bill of Rights (Edward Markey) • Customer Proprietary Network Information (CPNI) • CAN-SPAM Act of 2003 • General direction: make it easier for consumers to obtain anonymity • Key differences from traditional markets: • It is easier for consumers to become anonymous • But, also easier for sellers to store and use consumer data • Is easier-to-obtain anonymity desirable? Who benefits/loses?

4. Game • Firm(s) and many consumers • 3 Stages: • (1) Identification: past purchases  disclose info • (2) Anonymity Decisions: consumers decide whether to maintain their anonymity • (3) Purchasing & Discrimination: firm has some information about each consumer’s valuation, sets prices accordingly

5. Literature • Intertemporal Price Discrimination (Stokey 1979, Salant 1989, Riley & Zeckhauser 1983, Salant 1989); • Ratchet Effect(Freixas et al. 1985, Hart & Tirole 1988) • Recognition(Chen 1997, Fudenberg & Tirole 1998 & 2000, Villas-Boas 1999 & 2004, Taylor 2003, Chen & Zhang 2008) • Privacy policies (Taylor 2004, Acquisti & Varian 2005, Calzolari & Pavan 2006, Hann et al. 2007, Bouckaert & Degryse 2008), Survey: Fudenberg & Villas-Boas 2006 • Addressability(McCulloch et al. 1996, Rossi & Allenby 1999, Kim et al. 2001, Elsner el al. 2004, Hui & Png 2006)

6. Model • Two purchasing periods • Firm produces non-durable good, 0 marginal cost • Continuum of consumers with unit mass • Each period: a consumer can use 1 or 0 units • Consumer’s valuation v drawn from cdf F on [0,1] • Valuation is private info, same in both periods • Costs c to opt out, expended in second period

7. Extensive Form Sketch

8. Results Overview • Given • Firm cannot commit to future prices • Technical assumptions • Firm’s profit is non-monotonic, highest when cost of maintaining anonymity is zero • Consumer surplus may increase in the cost of anonymity, but only up to a point • Social surplus, extensions

9. Preliminaries • Socially optimal: all consumers get a unit in each period • If there is no customer recognition, firm sets the monopoly price p* in each period • If firm can commit to future prices + no anonymity (full recognition)  commits to monopoly prices • If firm can commit to future prices + opting outpossible  still commits to monopoly prices

10. Characterization • Consumers can opt out at a cost c • Firm tracks purchases, αis the proportion of purchasing consumers maintaining anonymity • Proposition: If c=0, all PBEs have the following properties: • (On path) prices = p* = argmaxp p(1-F(p)) • Consumers with v ≥ p* purchase and opt out (all consumers stay anonymous) • No-recognition outcome • (This is what the firm wants!)

11. Stage 3: Price Discrimination, c>0 • Anonymous consumers: • Identified consumers: • Ratchet effect:

12. Stage 2: Choosing Anonymity • For consumers to be willing to mix, • Derive α(p1).

13. Stage 1: Pricing & Identification • Firm’s first period problem

14. Comparative Statics (uniform)

15. Comparative Statics (uniform) When c is deadweight loss When c is collected

16. Conclusions • Firm benefits from free anonymity • Facilitating opting out can increase and also decrease welfare • Non-monotonicity in surplus, profit • Extensions: competition, opt in, correlated & heterogeneous costs, other benefits to/from identification/privacy, ... Thank you for your attention!