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Opt in versus opt out: A free-entry analysis of privacy policies

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  • BOUCKAERT, Jan
  • DEGRYSE, Hans

Abstract

There is much debate on how the flow of information between firms should be organized, and whether existing privacy laws should be amended. We offer a welfare comparison of the three main current policies towards consumer privacy .anonymity, opt in, and opt out .within a two-period model of localized competition. We show that when consumers find it too costly to opt in or opt out .such that the default is the policy that rules, privacy policies shape firms’ ability to collect and use customer information, and affect their pricing strategy and entry decision differently. The free-entry analysis reveals that social welfare is non-monotonic in the degree of privacy protection. Opt out is the socially preferred privacy policy while opt in socially underperforms anonymity. Consumers never opt out and choose to opt in only when its cost is sufficiently low. Only when opting in is cost-free do the opt-in and opt-out privacy policies coincide.

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Bibliographic Info

Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2007025.

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Length: 29 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:ant:wpaper:2007025

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Postal: Prinsstraat 13, B-2000 Antwerpen
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
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Keywords: Privacy; Price discrimination; Monopolistic competition; Welfare;

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  1. V. Bhaskar & Ted To, 2002. "Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry," Economics Discussion Papers 537, University of Essex, Department of Economics.
  2. Richard A. Posner, 1980. "The Economics of Privacy," University of Chicago - George G. Stigler Center for Study of Economy and State 16, Chicago - Center for Study of Economy and State.
  3. Qihong Liu & Konstantinos Serfes, 2005. "Imperfect price discrimination, market structure, and efficiency," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1191-1203, November.
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  13. Jeffery M. Lacker, 2002. "The economics of financial privacy : to opt out or to opt in?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-16.
  14. Severin Borenstein, 1985. "Price Discrimination in Free-Entry Markets," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 380-397, Autumn.
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  18. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
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