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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, vol. 10(1), pages 141-156, Spring.
  2. 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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  7. V. Bhaskar & Ted To, 2002. "Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry," Economics Discussion Papers, University of Essex, Department of Economics 537, University of Essex, Department of Economics.
  8. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier, Elsevier.
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  11. 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.
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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, Federal Reserve Bank of Richmond, issue Sum, pages 1-16.
  14. Mark Armstrong, 2005. "Recent Developments in the Economics of Price Discrimination," Industrial Organization, EconWPA 0511004, EconWPA.
  15. Curtis R. Taylor, 2004. "Consumer Privacy and the Market for Customer Information," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 631-650, Winter.
  16. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
  17. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  18. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
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