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Opt In Versus Opt Out: A Free-Entry Analysis of Privacy Policies

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  • Jan Bouckaert
  • Hans Degryse

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, 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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1831.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1831

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Keywords: privacy; price discrimination; monopolistic competition; welfare;

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  1. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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  8. Jeffery M. Lacker, 2002. "The economics of financial privacy : to opt out or to opt in?," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 1-16.
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  15. George J. Stigler, 1980. "An Introduction to Privacy in Economics and Politics," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 10, Chicago - Center for Study of Economy and State.
  16. Qihong Liu & Konstantinos Serfes, 2005. "Imperfect price discrimination, market structure, and efficiency," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 38(4), pages 1191-1203, November.
  17. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
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