Competing with Privacy
Casadesus-Masanell, Ramon, and Andres Hervas-Drane
Harvard Business School Working Paper, No. 13–085, April 2013
Published by Harvard Business Review
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 it with. 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 as a function of the consumer population’s valuation for the service, and show that competition has three main 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. And third, higher competition intensity tends to increase the volume of consumer information disclosed by firms. Our findings are particularly relevant to the business models of Internet firms and contribute to inform the regulatory debate on consumer privacy.