Economics of Identity Management: A Supply-side Perspective

1. Institute for System Architecture Dresden, Germany Economics of Identity Management: A Supply-side Perspective Workshop on Privacy Enhancing Technologies Dubrovnik (Cavtat), Croatia 30 May – 1 June 2005 Sven Koble & Rainer Böhme Kindly supported by FIDIS (“Future of Identity in the Information Society“) and the Workshop on Privacy Enhancing Technologies 2005

2. Overview • Supply-side Perspective • Why support an Identity Management System (IMS) • Analysis • Economic tradeoff • Comparison of different models • Scenario • Conclusion & Future Work Economics of Identity Management: A Supply-side Perspective

3. Motivation Why do vendors store privacy sensitive data ? 20000 € Vendor Knowledge about the customer or 16000 € Direct marketing Price discrimination Economics of Identity Management: A Supply-side Perspective

4. Motivation Why is protection of customers privacy important ? 65% declined to register at an e-commerce site: Estimated loss of sale, because of missing privacy protection in the U.S. 2002: $18 Billion Doubts about company‘s privacy protections Harris Poll June 2004 FTC 2000 Report to the U.S. Congress Economics of Identity Management: A Supply-side Perspective

5. Basics - IMS • IMS functions: • Manage own personal data • Different situation – different identities • Logging • Accountability – relative to pseudonyms Source: Sebastian Clauß and Thomas Kriegelstein http://drim.inf.tu-dresden.de/index.en.html • Important: Linking impossible • Between pseudonym – personal data • No purchase history • Vendor has to decide • Support an IMS, or keep processing customer data Economics of Identity Management: A Supply-side Perspective

6. f = Basics - Model All Customers without with privacy awareness • Assumptions: without IMS demand use of an IMS Maximise revenue Economics of Identity Management: A Supply-side Perspective

7. 50 € 70 € 25 € purchase not purchase t2 t1 Models • Perfect price discrimination • Baseline model • Customer groups • One purchase period • Customer behaviour • Two purchase periods realistic Economics of Identity Management: A Supply-side Perspective

8. A A D Price Price C B C B F E Quantity Quantity R = A + C + D + F high price R = C + F + B + E low price D + F > B high price two inequation including the factor f yielding to low price E + F > A Model – One Purchase Period without IMS with IMS Demand Revenue R R = A + B + C Benefit > Cost Case 1 Case 2 Economics of Identity Management: A Supply-side Perspective

9. A D C D C Price B B F F E E A Quantity Price • Max. value of f is root of a quadratic equation •  Upper bound f = 1 Quantity Model – One Purchase Period Intersection point gives max. value for f • A + D > B + E  Case 1 • A + D < B + E  Case 2 Economics of Identity Management: A Supply-side Perspective

10. 50 € 70 € 25 € purchase not purchase t2 t1 Models • Perfect price discrimination • Baseline model • Customer groups • One purchase period • Customer behaviour • Two purchase periods in any case: double demand required bound for worst case:double demand bound for worst case: increase demand by 50% Economics of Identity Management: A Supply-side Perspective

11. 6400 € 20 € each 320 400 80 6800 € 5 € each 400 € α = 4 with IMS 425 340 20 € each π = 0.8 Scenario - One Purchase Period Price depends on residence of the customer Publisher without IMS Monopoly for scientific journal π = 0.8 f > 6.25%  Introduction of an IMS profitable if demand increases by more than 6.25% 25 6800 € Economics of Identity Management: A Supply-side Perspective

12. Future Work • Monopolist Competitive market 20000 € • Allow arbitrage 18000 € 16000 € • More empirical data • Take other functions of an IMS into account Economics of Identity Management: A Supply-side Perspective

13. Conclusion • Given privacy aware customers, the introduction of an IMS might be rewarded with higher demand • Factor f definded to quantify additional demand • Valueable information for developers of IMS about potential early-adaptors • The success of privacy-enhancing Identity Management Systems is not only determined by technical but also by economic conditions Economics of Identity Management: A Supply-side Perspective

14. Thank you for your attention  E-mail: Sven.Koble@inf.tu-dresden.de Economics of Identity Management: A Supply-side Perspective

15. References • Acquisti, A., Varian, H.: Conditioning Prices on Purchase History. (2001) • Gellman, R.: Privacy, Consumers, and Costs – How the lack of privacy costs consumers and why business studies of privacy costs are biased and incomplete, (2002) • Odlyzko, A.: Privacy, Economics, and Price Discrimination on the Internet. In: Fifth International Conference on Electronic Commerce, ACM (2003) • Privacy and Identity Management for Europe (PRIME) http://www.prime-project.eu.org/ • Shapiro, C. and Varian, H.: Information Rules: A Strategic Guide to the Network Economy. Harvard Business School Press (1998) • Taylor, C. R.: Private Demands and Demands for Privacy: Dynamic Pricing and the Market for Customer Information. Department of Economics, Duke University, Duke Economics Working Paper 02-02 (2002) Economics of Identity Management: A Supply-side Perspective